A State digout could pave the way to property ladder
House prices are now almost as high as they were at the peak of the Celtic Tiger – and with soaring property prices set to continue for a number of years, first-time buyers have a battle on their hands for some time yet.
The housing shortage is likely to last until the end of 2024 at least, according to the Banking and Payments Federation Ireland (BPFI) in its latest Housing Market Monitor. This supply gap, along with rising building costs, is likely to push house prices up in the coming years, warned the BPFI. Already, average sale prices are “relatively close to the peak of the previous cycle in 2007”, said the BPFI.
All the more important then for first-time buyers to take full advantage of any State digouts to get onto the property ladder. Here are five ones worth knowing about.
With the Help-to-Buy (HTB) scheme, first-time buyers currently qualify for a tax rebate of up to €30,000 or 10pc of the purchase price of a new home (whichever is the less) for homes priced at €500,000 or less. First-time buyers building their own home can also qualify for the tax rebate.
Find out exactly how much of a tax rebate you qualify for with HTB before pursuing a particular property. “Everyone assumes they qualify for the maximum amount,” said Michael Dowling, managing director of Dowling Financial.
However, you may only qualify for a lower tax rebate than you expect if you haven't worked in any of the last four years because the rebate depends on the amount of income tax and tax on savings interest that you have paid in the four years prior to your application. Similarly if buying a house for less than €300,000, you won't qualify for the top €30,000 rebate as the most you get is 10pc of the property price.
The current tax rebates are higher than what is typically available under the scheme as enhanced HTB relief is available until the end of this year. Unless the enhanced relief is extended, the most you will be able to get as a tax rebate through the scheme in 2022 will be €20,000 or 5pc of the purchase price of the home (whichever is the less), so it would be worth getting your HTB tax rebate this year if you can. “Even people who are hoping to buy a second-hand property should apply for HTB as they may end up buying a new home if their search for a second-hand property is unsuccessful,” said Dowling.
To be eligible for the enhanced relief, you must have either signed a contract for the purchase of a new house or apartment between July 23 2020 and December 31 2021 – or have made the first draw down of the mortgage within that period if self-building your home. You may still be able to get the enhanced tax relief if you applied for HTB before the enhanced scheme kicked in.
Be sure to meet all of the conditions of HTB so that you don't lose out on the relief. For example, your mortgage must be at least 70pc of the purchase value of the property and you must live in the property as your main home for at least five years after you buy or build it.
For first-time buyers who earn too much to qualify for social housing but too little to get a sufficient mortgage from a bank, the government-backed Rebuilding Ireland Home Loan (RIHL) could be their best chance of getting onto the property ladder. With the RIHL, you can borrow up to €320,000 to buy or build a home in Cork, Dublin, Galway, Kildare, Louth, Meath and Wicklow and up to €250,000 elsewhere, as long as you borrow no more than 90pc of the value of the home. The HTB scheme can be used to contribute towards the cost of the 10pc deposit.
Qualifying for the RIHL could be harder than you expect. Almost half of applicants who applied for the loan so far this year were turned down. Some of the main reasons applicants are turned down include a failure on their part to show that they would be able to repay the loan, lack of savings and a poor credit record.
To be eligible for a RIHL, you must be a first-time buyer with an annual gross income of not more than €50,000 if a single applicant or not more than €75,000 combined if a joint applicant. Overtime and bonuses are taken into account when determining your gross income. So the total amount that you earn in a given year could easily rule you out of the RIHL.
Despite the various hoops that you must jump through, it is worth exploring the RIHL as you can borrow up to around four-and-a-half times your income – which is often more than you can borrow from the banks. For example, a single first-time buyer on a salary of €35,000 could borrow up to €162,039 through the RIHL. This is because the RIHL scheme circumvents the Central Bank's loan-to-income (LTI) ratio rules.
You typically can't borrow more than three-and-a-half times your gross income if getting a mortgage through a bank, however, unless you qualify for an exemption to the Central Bank's LTI ratio rules. Recent figures show that a small number of first-time buyers have borrowed up to four-and-a-half times their income from their bank after securing an exemption. (The Central Bank is currently reviewing its lending rules.)
Another advantage of the RIHL is that you know what your repayments will be for the duration of your mortgage as the interest rate is fixed for the entirety of the loan. The interest rate is either 2.78pc (for up to 25 years) or 3.04pc (for up to 30 years). This is higher than the interest charged when the RIHL was first launched in 2018 and so the State-backed mortgage is not as attractive today as it was three years ago.
A big drawback of the RIHL is that you can’t shop around for your mortgage protection insurance (MPI, which repays your mortgage should you die before repaying it) as you must get the cover offered by your local authority (unless you don't qualify for it). Concerns have been expressed about the cost of this MPI. You can however shop around for MPI if getting a mortgage from a bank.
With €210m in funding behind the RIHL scheme this year, there is a limit to the number of mortgages that can be granted. “It is anticipated that this is sufficient to maintain lending under current conditions in 2021,” said a spokesman for the Department of Housing. All the same, if the RIHL is for you, apply now – before the anticipated pick-up in the housing market.
Social housing tenants who are taking out a mortgage to buy or build their own home can get a mortgage allowance of €11,450 – paid over five years – to ease the transition from social housing to paying a mortgage, as long as they qualify for the payment. The allowance, which is paid directly to the lending agency, goes towards reducing mortgage repayments.
First-time buyers interested in buying a fixer-upper could get a tax break for those renovations if they buy a property under the Living City Initiative. With this scheme, owners of residential houses built before 1915 can claim tax relief on refurbishing costs over ten years as long as the building is in the historic centres of Dublin, Cork, Limerick, Galway, Waterford or Kilkenny. As the scheme will end on December 31, 2022, to ensure you get the tax relief, you have about about a year-and-a-half to buy a qualifying property and renovate or convert it. Be sure to meet the conditions of the scheme. You don’t have to be a first-time buyer to get this tax break.
First-time buyers struggling to get enough of a deposit and mortgage to buy their home may be able to overcome that stumbling block through the State's planned Shared Equity scheme. Under that scheme, the State takes an equity stake of up to 20pc (or up to 30pc in limited circumstances) in a newly built home, with the buyer taking out a mortgage to cover the rest of the purchase.
No interest is charged on the State's equity stake for the first five years – but thereafter an annual interest rate of 1.75pc is charged between years six and 15; 2.15pc between years 16 and 29; and 2.85pc from year 30 onwards. The homeowner can buy out the equity stake at any time and doing so within the first five years would allow you to avoid the interest charge on the equity – though it would be important not to overstretch yourself when doing so. Any remaining equity in the home will be repaid when the home is sold.
There are limits on the price of properties which can be bought through the scheme. At €500,000, the highest price cap is for apartments bought in Dublin City and Dun Laoghaire. The price cap on houses varies from €225,000 for houses in Cavan, Donegal, Leitrim, Longford, Mayo, Monaghan, Sligo and Tipperary to €450,000 in Dublin City and Dun Laoghaire.
The main advantage of this scheme is that it reduces the amount of finance a first-time buyer has to raise as well as the mortgage repayments they face.
Shared Equity needs the green light from the Oireachtas and Central Bank before it can go ahead. “It is anticipated that the scheme will commence later this year,” said a spokesman for the Department of Housing. So it’s early days for Shared Equity and although there are concerns that it could push up house prices, it may become a valuable lifeline for first-time buyers.