The Central Bank of Ireland told the Department of Finance that a scheme for mortgage interest relief would almost exclusively benefit homeowners aged more than 40 who were the least likely to have difficulties repaying their home loan.
In an analysis of Government plans to help mortgage holders in last year’s budget, the central bank said the scheme was not focused on those who were suffering most from the “shock” of rising interest rates.
It said that of those to benefit from the scheme, only 8 per cent were paying extortionate rates of greater than 6 per cent, the group the Central Bank believed most needed help from Government.
It said plans for the scheme, as presented to them, would “almost entirely” benefit holders of tracker mortgages who for many years had substantially lower interest bills than other householders.
It said those eligible for the scheme also had smaller loan balances and that it appeared to largely exclude younger borrowers who were far more likely to have bigger loans to repay.
An analysis of the scheme said: “Tracker mortgage holders, who represent the majority of eligible borrowers, are much less likely than [variable rate] mortgage holders to be in the lower-income cohorts of the mortgage market. And they are less likely to have entered this shock with large debt service burdens relative to income.”
It said giving mortgage holders tax relief they didn’t genuinely need was a “deadweight” and risked increasing house prices without any increase in homeownership rates.
The analysis from October last year said the mortgage interest relief scheme would cost about €120 million annually but that there was a risk this could rise in future years. It added that removal of the relief could prove tricky for the department as “households may believe that in the future government will step in to support them in adverse circumstances”.
“The Central Bank would have deep reservations were the scope of the scheme to widen to include new lending, as it would provide another pro-cyclical demand-side stimulus in a housing market that is characterised by extremely weak supply.”
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It said a combination of mortgage interest relief and other Government schemes including Help-to-Buy could interact to create “additional overheating risks” in the housing market.
“This could represent a particularly poor use of taxpayer funds without solving the underlying structural issues in the housing market,” noted the analysis.
The central bank also warned there was the potential for a mortgage interest relief scheme to encourage lenders to increase their rates. “Under such a scenario, the relief would act to support lender profitability without necessarily helping borrowers as intended.”
The central bank was asked to examine a possible scheme that would apply only to those who had mortgages with interest rates of greater than 6 per cent. It said that while the number of people to benefit would be relatively low, it was possible this would grow if interest rates continued to rise.
The financial regulator said it was feasible such relief could discourage mortgage holders from switching to rates of say 5.5 per cent or 5.75 per cent in case they would lose their Government support.
“There is no targeting of the scheme to those with the greatest affordability challenges. There is little or no relationship between income and mortgage interest rates.”
The central bank said the fairest way to help struggling householders was through the social welfare system with means-testing and direct targeting of those worst affected.
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