Rebuilding Ireland? All you need to know about the loan scheme would-be buyers are finding it difficult to take advantage of
A good friend of mine is in his mid-thirties and still living with his parents - because he can't get the mortgage he needs to buy his first home.
He's single and earning €35,000. He manages his money well and has built up good savings over the years. He has no debts. Dublin has been home all of his life and he wants to continue living there. However, on a salary of €35,000 and as a single mortgage applicant, the most he can expect to borrow from a mainstream lender is about €122,000. At that rate, buying his own home simply isn't an option - unless he can do so through the new State-backed mortgage scheme.
This Government-backed scheme, the Rebuilding Ireland Home Loan (RIHL), was launched last February. The aim of this scheme is to make it easier for first-time buyers who earn too much to qualify for social housing, but too little to get a sufficient mortgage from a bank to buy their own home. Under that scheme, you can borrow up to €288,000 to buy a home in Cork, Dublin, Galway, Kildare, Louth, Meath and Wicklow, and up to €225,000 elsewhere - as long as you're eligible for a RIHL and are borrowing no more than 90pc of the value of the property. The amount of your earnings that are taken up repaying the RIHL - as well as other debts - also determines how much can be borrowed.
On his salary of €35,000, my friend could borrow up to €178,609 through a RIHL -€56,000 more than he can get from the banks. Coupled with the deposit he has saved, this €178,609 loan should allow him to buy a property priced at around €200,000. That's way short of average asking house prices in Dublin but €200,000 might still buy him an apartment or fixer-upper home in Dublin (as long as he's flexible on location).
The RIHL is therefore probably the best chance that my friend - and the many other young people in a similar boat - has to buy a home.
However, almost three-fifths of applications for a RIHL have been turned down or deemed invalid.
By the end of last July, 2,320 applications for a loan under the RIHL scheme had been made - and 513 were deemed invalid. Of the 1,807 valid applications, 879 (52pc) were recommended for approval, 823 (48pc) were recommended for decline, and a further 105 applications were still in progress, according to the Department of Housing, Planning and Local Government. Only 134 loans had been drawn down under the scheme by the end of last June, according to figures obtained by Fianna Fail's housing spokesman Darragh O'Brien under Freedom of Information.
To be eligible for a loan under the RIHL scheme, 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. "Gross income is calculated for eligibility purposes as the gross basic salary plus allowable extras, such as overtime, bonus payments and commission, where regular and verified," said a spokesman for the Department of Housing.
Therefore, should regular overtime, bonuses and commission push your income over €50,000 (for a single applicant) or €75,000 (for joint applicants), your application for a RIHL is likely to be deemed invalid - and you therefore won't be able to get a mortgage through the scheme.
"Anecdotally, the rules for the RIHL scheme are extremely rigid," said Michael Dowling, managing director of the mortgage brokers, Dowling Financial. "You've people who think they qualify based on their basic salary - but then they're being declined because of overtime."
To be eligible for the RIHL, you must provide proof of insufficient offers of finance from two banks or building societies. This requirement is making it difficult for some people to successfully apply for a RIHL, according to Galway East TD and former minister of State for the OPW, Sean Canney. "To get two mortgage refusals from a bank can sometimes be a challenge," said Canney.
Banks may be reluctant to issue mortgage decline letters to people who purely need those letters so they can apply for a RIHL, according to Dowling. "In order for a bank to decline a mortgage, a bank needs a fully packaged mortgage application and the bank has to process that application in the same way as they would do so for a genuine applicant," said Dowling. "Banks may consider it unfair that they have to process a mortgage application for someone - knowing it's facilitating a competitor and also delaying genuine borrowers who are looking for a mortgage from the bank. It could cost a bank €400 to process a mortgage application - if that application is going nowhere, why would they clog up their system with it?"
Under Central Bank loan-to-income ratio rules, banks can only lend first-time buyers up to three-and-a-half times their income - though some exceptions are allowed. A bank may refuse to even process a mortgage application if an applicant's salary is too low for the mortgage being sought - and so getting mortgage decline letters in such instances could be difficult.
Let's say that a first-time buyer is earning €35,000 and applying for a mortgage of €250,000. Under Central Bank loan-to-income ratio rules, banks would not be able to approve such a mortgage. An individual seeking such a mortgage would not have his mortgage application processed by Bank of Ireland - because he does not meet the minimum criteria for the mortgage, according to the bank. AIB said it would fully process such a mortgage application "provided the customer fully completes a mortgage application form and provides evidence of income".
A spokesman for AIB added that it would "issue an approval or decline decision letter for any customer who presents for a new mortgage facility, subject to receipt of required documentation confirming personal demographics and income levels".
Ulster Bank said it would inform customers if it could potentially lend them the amount they want to borrow. "If a customer wants to proceed with an application that is likely to get declined, we will of course proceed with that and provide them with the decline letter, as standard," said a spokeswoman for the bank.
KBC said it could issue decline letters without fully processing a mortgage application as long as an individual provides proof (such as a payslip) that they don't meet KBC's minimum criteria.
The requirement on RIHL applicants to provide proof of insufficient finance from two banks or building society looks set to stay. "As one of the central policy aims of the RIHL scheme is to allow access to mortgage finance to those who cannot avail of such from a commercial lender, there are no plans to change this requirement," said a spokesman for the Department of Housing.
The RIHL is a much cheaper mortgage than most of those available from banks. As you could borrow up to five times your income under the RIHL, the scheme circumvents the Central Bank's loan-to-income ratio rules. Some question the wisdom of such Central Bank rule-dodging but for many first-time buyers, the RIHL scheme is their only chance to buy their own home. However, if only two out of five of those applying for this loan are getting approved for it, perhaps more needs to be done to help first-time buyers take up this option.
Rebuilding Ireland home loan: what you need to know
HOW TO APPLY
You must apply for the Rebuilding Ireland Home Loan (RIHL) directly to the local authority in whose area the property proposed for purchase is situated. Applications are centrally assessed by the Housing Agency on behalf of each local authority, and a recommendation on each application is then made to the local authority.
THE INTEREST RATES
As the interest rate charged on the RIHL is between 2.02pc and 2.32pc, the interest is much lower than that charged by the banks on most mortgages. The monthly repayments on a 30-year fixed mortgage of €178,609 under the RIHL scheme work out at €683. Were a first-time buyer to borrow the same money from a bank, the monthly repayments under a five-year fixed rate could easily come to €750; the monthly repayments on aten 10-year fixed rate would come to at least €800.
ELIGIBILITY AND WORK
To be eligible, you must behave been in continuous employment for at least two years if you are the single or main applicant. Should you be the secondary applicant, you must be in continuous employment for at least a year. When applying for the loan, you must provide a P60, recent payslips and a salary certificate as evidence of your earnings. Self-employed applicants must submit two years of certified accounts.
PROOF OF MORTGAGE REFUSALS
Evidence of insufficient offers of finance could include a letter from a bank or building society with an inadequate mortgage offer, or a letter from a bank or building society stating that your application is outside its lending criteria (often referred to as a mortgage decline letter). The Department of Housing says it is “not aware of specific instances where banks are declining to issue refusal letters to individuals who have completed the application process for a mortgage with a commercial lender”. However, should you run into difficulties getting such letters, you shouldcan query this with the institution in question in the first instance “in the knowledge that you have the option of raising a complaint with the Financial Services and Pensions Ombudsman,” added a spokesman for the department.
REASONS FOR BEING TURNED DOWN
Some of the reasons that a RIHL application can be turned down include “an inability [by the applicant] to demonstrate repayment capacity, an unsatisfactory savings record, or other factors in line with assessing a person’s ability to repay a mortgage”, according to a spokesman for the Department of Housing. “Applicants that upon initial examination are found not to meet the basic requirements of the scheme, such as not being a first-time buyer or earning an income which exceeds the prescribed limits, can also be considered invalid.”
As there is €200m in funding behind the RIHL scheme, there is a limit to the number of mortgages that can be granted. However, more funding should be in the pipeline. “The minister expects the Housing Finance Agency to return to the market for a second tranche of funds as required,” said a spokesman for the Department of Housing. “There is no end date for the scheme.”
Sunday Indo Business