Sunday 21 January 2018

Credit unions consider move into mortgage market

Parents will get cash to pay for children's deposits as community lenders enter home-loan market

The revelation that the credit union will let parents borrow significant sums to help their children get on the property ladder is controversial as it flies in the face of the Central Bank's plans to foster prudent borrowing.
The revelation that the credit union will let parents borrow significant sums to help their children get on the property ladder is controversial as it flies in the face of the Central Bank's plans to foster prudent borrowing.

JEROME REILLY and THOMAS MOLLOY

Credit unions are planning to give cash loans to parents who want to help their adult children beat the Central Bank's tough new mortgage-deposit rules.

And in a separate move that will radically shake up the home-loan market, the asset-rich credit union movement has earmarked an initial €100m for home loans as it prepares to enter the mortgage market.

Fresh competition in the mortgage market will intensify the already fierce battle among home-loan providers which has pushed down borrowing costs in recent months.

It also marks the return of the voluntary ethos to the mortgage market after the near wipe-out of building societies in the last decade.

Credit unions are planning to let parents borrow significant sums to help their children get on the property ladder is controversial as it flies in the face of the Central Bank's plans to foster prudent borrowing.

First-time buyers who want to buy a home priced at €350,000 now need a €48,000 upfront cash deposit to get a mortgage under the new regime.

It was anticipated that parents would help children bypass the deposit rules by subterfuge - taking out loans for, say, 'home improvements' which would be used to boost their children's savings.

But now the credit unions are saying that parents can be upfront about taking out loans specifically to help their children buy a home.

The Irish League of Credit Unions (ILCU), which represents 469 branches around the country, will allow parents to borrow significant sums in the knowledge that the money will be used by their offspring to circumvent the 20pc deposit demands.

A senior credit union source told the Sunday Independent: "If parents have strong income and probably low borrowings and can demonstrate that they can meet repayments on such a large borrowing, then it is possible that they would get such a loan from a credit union."

The Department of Finance would not comment on the proposals.

The Central Bank also said it would not comment directly on the move to allow parents borrow to fund children's mortgage deposits. However, a Central Bank source said the responsibility is on banks and credit unions to apply "prudent credit assessments" when lending.

Financial experts last night said this type of lending could be approved because it spreads risks between generations and ensures that banks are not exposed. However, there is a danger that looser lending can fuel house price rises and increase the risk of another property bubble.

While the credit unions will give loans to parents, they will not approve loans to home buyers themselves for a mortgage deposit.

"Credit unions would not be in a position to offer these type of loans," a source said.

The plan to compete with banks and building societies in the home-loan market will have to be approved by the Central Bank. Despite recent cuts, variable mortgage rates here remain among the highest in the eurozone.

On average, first-time buyers here pay €2,500 more each year for mortgages than borrowers in other European countries.

A special internal committee headed up by former Postbank boss Margaret Sweeney has been investigating a move into home loans since last September. It will present its report to the ILCU board of directors on Saturday.

Despite the crash, credit unions are cash rich, with €2.2bn in assets. The ILCU has already earmarked 5pc of those assets - more than €100m - for its mortgage business.

"What this new proposal will do is to create a centralised lending capacity which will be managed by the Irish League of Credit Unions," a credit union source said.

"Mortgage applications would be funnelled through local credit unions that want to participate, but managed at a central level.

"Presumably all the local credit unions would put money into the pot. The reputation of credit unions is strong. People are more likely to trust their credit union than the banks."

The average credit union loan is just €6,000, and mainly used to fund car purchases, holidays and home improvements.

David Hall of the Irish Mortgage Holders Organisation welcomed the credit union move into the home -loan market last night.

"It will increase competition. The credit unions are liked and trusted and many people would have hoped they would have got involved in mainstream lending a lot sooner," he said.

"Interest rates are too high. We have just given the banks the new deposit rules on mortgages, which is effectively a 20pc insurance policy to the lender. We should have seen a rate reduction but we haven't."

However, Mr Hall was critical of any move to give loans to parents to help their children get on the property ladder.

"That's controversial, but I'm not surprised. Credit unions have been stung in the past by giving loans to people in order to help them get mortgages from other institutions."

However, Ciaran Phelan of the Irish Brokers Association said: "In many cases borrowing from mum and dad is the only way that people will be able to meet the 20pc deposit demand," he said.

Under the new regulations, first-time buyers can borrow up to €220,000 with a 10pc deposit, but will require a deposit of 20pc on any borrowings in excess of that amount.

Sunday Independent

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