New borrowing limit in help-to-buy scheme leaves buyer in a spin

Q&A: Dominic Coyle answers your personal finance questions

Buying a house: just because the minimum requirement is 70 per cent does not mean you must borrow only 70 per cent. Photograph: Paul Faith/PA Wire

Buying a house: just because the minimum requirement is 70 per cent does not mean you must borrow only 70 per cent. Photograph: Paul Faith/PA Wire

 

I’m wondering how this grant should help people to buy a first house. The biggest issue is to save the 10 per cent deposit on the house up to a certain value. I hoped this rebate would help a lot but it looks like is useless help.

In the order to be qualified for new grant, I need to take a 70 per cent loan to value mortgage so I need to save 20-25 per cent for a deposit. In terms of money now, I need to save twice more for deposit and then the grant will bring my deposit towards required the 30 per cent balance in the above mentioned 70 per cent loan to value mortgage.

I don’t see how this would help the majority of first-time buyers. Can you explain it?

Mr K W, Laois

You are absolutely correct. The biggest issue for people looking to buy their first home is the obligation that they must save a deposit of at least 10 per cent of the property price. And that is only if the home you wish to buy costs less than €220,000.

If it costs more, you must save 10 per cent of the first €220,000 and 20 per cent of anything above this figure.

However, I think you are a little confused by the change the Government made in the rules of the proposed help-to-buy scheme in the Finance Bill it published last Thursday.

Originally, the rules said that unless you borrowed at least 80 per cent of the price of the home, you would not be eligible for this rebate of your income tax.

However, as the Central Bank pointed out, most first-time buyers, even now, are not borrowing 80 per cent. The average mortgage loan for first-time buyers is, in fact, just over 78 per cent. The Central Bank said setting the limit at 80 per cent was, in effect, forcing people to borrow more than they might need and more than they could easily repay.

That would potentially make the problem of loan arrears worse, not better, which seemed to be a bad idea.

I had letters from people who had deliberately saved more than the minimum deposit (or possibly arranged unofficial assistance from family) and could not believe that they would lose out on this rebate because of their efforts not to borrow more than they needed.

But just because the minimum requirement is 70 per cent, it does not mean that you must borrow only 70 per cent. Under the new rules now in the Bill, a first-time buyer can borrow anything between 70 per cent and 90 per cent of the value of their new home.

So, if you were borrowing 80 per cent or even more of the loan to value before this change, you are still okay. It is just that more people will be able to use the scheme.

The rebate offers a maximum of 5 per cent of the price of your home up to a maximum of €20,000. So if you are looking to buy a home in Laois for €220,000, and assuming you have paid enough income tax in Ireland over the last four years, you can claim a rebate of 5 per cent – €11,000 – and add it to your own savings of at least €11,000 to make the 10 per cent deposit required (€22,000). You can then borrow the remaining 90 per cent – €198,000.

If the house is a little more expensive – say €270,000 – your 5 per cent rebate is €13,500. However, the deposit you need is higher. Because the property is costing more than €220,000, you must have a deposit of 10 per cent of the first €220,000 (€22,000) plus 20 per cent of the other €50,000 (€10,000). That is a total deposit of €32,000, or €18,500 from you plus your income tax rebate of €13,500.

Again, you can borrow all the rest – €238,000 – from a bank, assuming they agree it meets other rules from the Central Bank about only lending within certain multiples of your income.

You are certainly not forced to borrow only 70 per cent of the property price – €189,000 in this case – and find the other €81,000 yourself, including the rebate.

I know it is no consolation to people looking to buy their first homes at the moment, but the requirement for a deposit of 10 per cent or more was standard practice until the property bubble saw banks throw out all sensible rules in pursuit of market share.

All the Central Bank is doing is restoring some sanity to the market. It is, of course, a pain to fall just the wrong side of the rules – where people who bought before the new rules had no deposit obligation while those buying now, like you, are obliged to save considerable sums. But, in fairness, if you are looking to enter a loan contract that requires the discipline to repay significant sums of money every month over a long time period regardless of changes of job, family circumstances etc, it is sensible to require some evidence of a commitment to saving – ie a deposit.

Please send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street, Dublin 2, or by email to dcoyle@irishtimes.com. This column is a reader service and is not intended to replace professional advice.

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