Home Choice Loan an option for first-time buyers
The Home Choice Loan is another option for first-time buyers. However, despite low interest rates it has received few applications and plenty of criticism, writes John Cradden
IF you have been trying and failing to get approval for a mortgage in recent months, you might not be aware of a government-run mortgage loan scheme called Home Choice Loan (HCL).
HCL is a state-backed mortgage specifically for first-time buyers who can prove that they have been unable to get "sufficient finance" from at least two banks or building societies.
According to Martina Burke, communications manager for the Government's Housing and Sustainable Communities Agency, which oversees the scheme, HCL was designed to help those who wanted to buy a home but were unable to do so because of the credit crunch.
It is provided by local authorities nationwide, although applications must be processed through an HCL-authorised mortgage broker.
Successful applicants can borrow up to 92pc of the house purchase price to a maximum of €285,000.
The current interest rate, which is variable, is set at an attractively low 2.9pc (2.94pc APR), which compares well with the variable rates of between 3.5 and 4pc currently on offer from commercial lenders.
But since the scheme was officially launched in January 2009 it has attracted more than its fair share of critics, particularly politicians and mortgage brokers.
On the face of it, it's not difficult to see why. Given the difficulties many first-time buyers have experienced in getting mortgage approval over the past two years, you might expect such a scheme to attract hundreds, if not thousands, of applications.
According to written responses by Housing and Local Services Minister Michael Finneran to questions in the Oireachtas, just 44 applications were made during the course of 2009, of which four were approved.
Up until July this year, there were a further 41 applications, leading to a further five approvals.
This slight surge in applications may reflect the fact that the terms of the scheme were altered in January this year to allow applicants to buy secondhand as well as new homes.
"At the time of the launch of Home Choice Loan in January 2009, around two-thirds of first-time buyers were buying new houses," said Ms Burke.
"However, since then first-time buyers' purchasing preferences have shifted and more than half of all first-time buyers are now opting for second-hand houses as prices fall further and affordability eases."
In addition, the minimum income requirements were lowered from €40,000 to €35,000 for single applicants and from €50,000 to €45,000 for joint applicants.
Following a low-key, mainly online, awareness campaign run over the summer by the Housing Agency, there has been a small increase in applications to the scheme.
The number of applications now stands at more than 100, with a total of 17 applications now approved in principle, according to the agency.
According to Mr Finneran, the administration cost to date of the scheme is nearly €300,000.
The Professional Insurance Brokers Association (PIBA) has been vociferous in calling for the reform or abolition of the scheme given how few applications have been approved to date.
"We were glad to see Home Choice reducing their minimum income requirements, and assessing mortgages for those on contract, but we feel this isn't enough," said PIBA's direct of mortgage services, Rachel Doyle.
She adds that the minimum income requirements are still higher than Permanent TSB's requirements, for instance.
"If a client is refused approval from two lenders, they will not be approved by Home Choice Loans as their criteria is as strict as the other lenders," she says.
Fine Gael's housing spokesman, Terence Flanagan, last month labelled the scheme "an embarrassment and a waste of money".
Mr Flanagan suggested that €500m earmarked by the Finance Minister for the scheme could be better used elsewhere.
However, Ms Burke says that the €500m mentioned was a nominal figure that referred to the possible borrowing needs of the scheme at the time of the launch.
"So the funding was never actually reserved and therefore it wouldn't be available for other projects."
Many others have also spoken out against HCL, describing it as effectively the State's sub-prime mortgage lender and a bailout for builders.
However, some of these criticisms may be unfair on HCL in terms of its actual remit.
For a start, sub-prime lenders traditionally charge very high interest rates, while HCL's rate is one of the lowest in the market.
Furthermore, HCL is administered using what Ms Burke calls "normal credit criteria and prudent lending practices".
In other words, all applicants must be able to show they can afford to service the mortgage.
She says HCL was designed to "facilitate rather than incentivise" house purchases.
"It provides a line of credit to certain first-time buyers, operating through a small number of local authorities acting on a regional basis."
The clear implication is that it would be nothing short of irresponsible in the current climate if HCL's lending criteria was more relaxed than commercial lenders -- never mind sub-prime lenders.
"The lending criteria for Home Choice Loan was deliberately set to safeguard borrowers and ensure that they could pay a mortgage."