Thursday 13 December 2018

Mortgage scheme for low earners involves 'significant risk exposure for the State' - Department of Finance

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Charlie Weston Personal Finance Editor

The Department of Finance warned that a Government-back mortgage scheme for low earners would involve risks for the State.

The scheme was launched by Housing Minister Eoghan Murphy, but has been labelled State-supported subprime lending.

Called the Rebuilding Ireland Home Loan it is for first-time buyers only.

But the officials in both Departments of Finance, and Public Expenditure and Reform, said the scheme would do nothing to improve the supply of housing.

Borrowers pay a fixed interest rate of 2pc to 2.25pc for 25 to 30 years. Income cannot exceed €50,000 for a single person or €75,000 for a couple.

Communications sent to the Housing Department from Finance before the scheme was introduced questioned the rationale for the new scheme.

“The rationale for this measure is unclear as this amounts to a demand-side measure in the context of a supply-related problem,” the Department of Finance wrote.

The loan scheme involves “significant risk exposure for the State”, according to documents released to RTÉ’s ‘Morning Ireland’ under Freedom of Information rules.

Finance officials noted that the loan limits are quite generous relative to median residential prices.

“Even if it were workable, this measure would do nothing to increase housing supply at a time when supply not demand is the problem.”

Read more: Property prices jump by more than 12pc in year

The Finance officials were also concerned last September that the scheme would breach State aid and competition rules.

Concerns were also expressed that the new loan scheme is not subject to Central Bank mortgage limits, aimed at ensuring lending is safe.

The Department of Housing said that its responses to the Finance officials addressed all the concerns.

“No changes were made to our proposal,” a spokesperson for the Housing Department said.

The Rebuilding Ireland Home Loan was never intended to increase supply, the spokesperson said.

“It is intended to facilitate a home loan to eligible applicants who were refused a mortgage with commercial lenders.”

It argued that “as the interest rate is to be fixed over the full life of the loan, thereby limiting borrowers’ exposure to interest rate rises, it is not necessary to apply the Central Bank loan-to-income regulations to the scheme”.

The Department of Housing added that loans with repayments in excess of 35pc of net income would not be allowed, save in limited, exceptional circumstances.

However, Housing officials did admit that arrears for local authority loans are two-and-a-half times higher than those for banks.

Some 24pc of local authority mortgages taken out before 2009 are in arrears for more than three months.

Two months after initially raising concerns, officials in both the Department of Finance and the Department of Public Expenditure and Reform withdrew their objections to the scheme.

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