Why the Government’s affordable loan scheme was flawed from the start

Some years ago I went looking for a home with a friend who had qualified for affordable housing.

It was April 2010, Anglo Irish Bank had collapsed, the State was teetering on the brink of an economic crash and the IMF was waiting just around the corner with a bailout cheque.

The affordable housing scheme then in place was also nearing extinction. Introduced in the early 2000s, it required builders to set aside a certain number of properties – known as Part V obligations – to be sold to those qualifying for affordable housing, typically buyers with single incomes of up to €58,000 or couples with up to €75,000.

In the run-up to the boom, the scheme was oversubscribed, and getting a reasonably priced property was difficult. By the time my friend was looking to purchase, the queues had gone, and councils had, in fact, given up on the scheme, allowing buyers to purchase without fear of a clawback should they sell.

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Many were just looking to shift their stock of outstanding properties. Dún Laoghaire Rathdown, for example, put 113 apartments up for sale on the open market, with priority given to qualified affordable housing applicants.

My friend didn’t end up buying at the time, and the scheme was stood down in 2011. While far from perfect, its demise has left a sizeable void until earlier this year when the Government launched the Rebuilding Ireland Homeloan scheme, targeting a similar cohort of people.

On paper at least, it’s a no-brainer. Low-cost loans of just 2 per cent, fixed for 25 years. It’s a neat way of getting around the affordability problem at a time of soaring property prices. Too often, we look at house prices only when we talk about affordability.

Cost of finance

But the cost of finance can be just as important. After all, a house on the market for €200,000 will actually cost you some €303,000 in total over 30 years at 3.5 per cent, once you factor in the cost of finance. On the Government’s scheme, it would cost just €266,000, or some 14 per cent less, at a rate of 2 per cent.

It brings down the monthly repayments from €898 a month for the market mortgage rate example versus €739 for the affordable housing level. It’s the same house with the same sale price but, thanks to cheaper financing, it is suddenly a lot more affordable.

Which is why it’s such a shame that the loan scheme has gotten off to such an anaemic start.

As of end-September, it had attracted almost 3,000 applications but just 1,134 of these have been recommended for approval by the Housing Agency.

For people paying hefty rents, the scheme must have looked like a godsend, with its promise of a first step on the property ladder. But with a rejection rate of some 61 per cent, it has quickly turned into a waste of time for many.

What’s going wrong?

Some applicants simply won’t meet all the requirements, and others will have too much outstanding debt, or too high an income, that will preclude them from the scheme.

But the structure of the product is also to blame. Unlike Central Bank mortgage rules, which limit mainstream lenders to 3.5 times salary, councils use a different metric – home loan repayments should be no more than 30 per cent of net monthly income.

A lower borrowing rate means lower monthly repayments, which should make housing more affordable.

Mortgage protection

However, what was unclear when the scheme first launched is that this 30 per cent hurdle must also include the cost of mortgage protection insurance (MPI). This is a typical lending requirement. And if it could be purchased in the open market, there wouldn’t be a problem. However, under the scheme, applicants must get this insurance from their local council. While extensive – as it also offers disability benefits – it’s very expensive.

Applicants getting the maximum loan amount of €288,000, for example, can expect to pay as much as €133 a month for mortgage protection, or almost €1,600 a year. To put this in context, a 30-year old can get similar cover with Aviva for just €15 a month, or €180 a year.

Not only does a Rebuilding Ireland Homeloan applicant’s mortgage protection look pricey, it also diminishes the borrower’s ability to repay their loan, and thus the amount for which they might be approved.

For example, an applicant securing the maximum loan of €288,000 would have needed net income of €4,070 a month, to meet the 30 per cent rule (ie, a monthly repayment no higher than €1,221). But with MPI of an extra €133, this has shot up to €4,513 (repayment of €1,354 a month).

And there are other issues, too. Some applicants complain that the process is taking too long, others that certain councils take overtime earnings into account while some don’t when assessing if people meet income thresholds. And then some councils’ credit committees meet only once a month.

Pointing to such "inconsistencies" recently, Minister for Housing Eoghan Murphy said the new scheme would be reviewed just eight months on from its introduction.

Building affordable housing is not easy. There is no magic bullet solution. But calling a scheme “affordable”, when it carries a monthly mortgage protection charge totally out of kilter with the market rate and about which applicants don’t find out until late in the process, does not help anyone.