Six reasons to think twice about the new scheme for first-time homebuyers

Having been flagged for quite some time, the Government’s new €400 million shared equity scheme was finally launched earlier this month.

The First Home Shared Equity scheme will see the State take an equity share, of up to 30 per cent, in the purchase of a new home. It is aimed at helping to close the affordability gap for those who may earn too much to be eligible for social housing, but not enough to pay the full market price themselves, by giving such a buyers “a leg up”, as the radio ad says.

If a buyer only has to borrow 70 per cent of the purchase price, they should be able to buy a home they otherwise couldn’t afford, so the thinking goes.

[ First-time buyers borrow more to secure a home ]

[ Explainer: How will the Government’s new First Home scheme work, and can I get access? ]

The scheme is restricted to first-time buyers (plus those separated/divorced who no longer have a financial interest in a home) and the new home they are buying must not exceed certain price caps; ranging from €250,000-€450,000 depending on location. This means the maximum stake a potential homeowner can benefit from will be €135,000. While the stake does not have to be repaid, if it isn’t, applicants will have to start paying fees on it from year six.

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The timing of the launch is good, coming as it does after the Economic and Social Research Institute’s (ESRI) recent report, which showed the likelihood of so many people reaching retirement without owning their own home, and the financial difficulties this can give rise to. Pitched at this so-called locked-out generation, there is likely to be considerable interest in the new scheme. However, while it may have its benefits, there are some potential downsides applicants should consider first.

It might push up prices further

The biggest concern for the scheme, perhaps, is its potential impact on the overall market and on property prices.

When launching the initiative, the Government said it has been designed to “avoid causing distortions” by targeting first-time buyers only, and by applying a price ceiling. As was the case with Help to Buy however, which has a ceiling of €500,000, such limits can often result in prices rising upwards to meet it.

And the scheme is being launched into an already hot property market; latest figures show property prices rose by 14.4 per cent in the year to May, and, while growth might be easing, prices are still moving upwards. So, adding a sizeable cohort of buyers — Property Industry Ireland has said that the “locked-out generation” accounts for about 440,000 households — is likely to put further pressure on prices.

A clear worry is that while the scheme may initially make homes more affordable, it will push up prices even further. So, in the long run, rather than make homes more affordable, it will ultimately make them more expensive. This was the experience in the UK, where a report earlier this year into its Help to Buy scheme, which, like the First Home scheme, provides an equity loan to buyers, showed that it “inflates prices by more than its subsidy value in areas where it is needed the most”. While it proved beneficial in areas of lower demand, in “hotspots”, such as London, the subsidy went “straight into price”. The report concluded that the money spent on the scheme would have been better spent directly on increasing housing supply, rather than on a “developer subsidy” such as Help to Buy.

You can’t get a mortgage exception and apply for First Home

Under First Home rules, if you qualify for a mortgage exception under Central Bank lending criteria, you won’t be entitled to apply for the shared equity scheme. Currently, potential home buyers can only borrow 3½ times their income under mortgage rules; however, an exception is possible for up to 20 per cent of mortgages in any one year with some applicants able to borrow up to 4½ times their income.

This means, for example, that a couple on €100,000 can only borrow €350,000 without an exception; or about €450,000 if they get one. So, it can have a significant impact on a person’s ability to buy a home.

According to a spokesperson for the scheme, the decision not to allow those enjoying a higher borrowing multiple is because allowing this “would create a distortion relative to applicants who are not availing of an exception”.

So, if you are in a position to qualify for an exemption (typically reserved for those on higher salaries/joint applications), you will have to decide which is the best option for you. “Individuals or couples should seek independent financial advice to decide what option is best for their individual circumstances,” the spokesperson says.

You may end up owing more than you thought

When you take out a shared equity loan, the government takes a percentage stake in the property, rather than a fixed euro amount. This means that the stake is liable to change depending on the future direction of property prices.

For example, let’s say you buy a home for €300,000, availing of a 10 per cent First Home Shared Equity share. At the time of purchase, the stake is worth €30,000; but 10 years down the line if property prices have risen and the home is now worth €400,000, the equity stake has also risen to €40,000 (plus any accrued service charges).

On the other hand, should property prices fall, and the home is only worth €220,000 after 10 years, then the value of the stake has shrunk, down to €22,000.

Switching might be tricky

The First Home Shared Equity scheme doesn’t preclude you from switching mortgage lender; it does however, restrict you to only swapping to a participating lender. At present, this means Bank of Ireland, AIB and Permanent TSB.

So if another provider, be that another bank, a nonbank lender or a credit union, offers you a better mortgage rate, the only way you will be able to access this is if you have the cash on hand to pay off the State’s stake, or you get a mortgage big enough to pay it off, so you can exit the First Home scheme altogether.

Now the caveat here is that this may change, if and when other lenders come into the scheme over time. If it doesn’t change however, you may potentially be locked into less competitive borrowing rates.

It will cost you

The equity stake is not a loan and doesn’t have to be repaid until either the property is sold, you decide to rent it out, or you want to switch lender. However, you will have to pay a service charge on the equity stake for as long as it remains unpaid. This kicks in after six years, at a rate of 1.75 per cent (years six to 15); 2.15 per cent (years 16-29) and 2.85 per cent (30 plus).

As the rate is fixed, based on the value of the stake when you bought the property, you may end up paying a fee on the stake that is greater than current market values might be, should property prices fall.

Based on a purchase price of €400,000, an equity stake of €50,000 will cost a homeowner €875 a year after six years to service, rising to €1,075 a year after year 16, and €1,425 after 30 years. Over 24 years, based on a typical 30-year mortgage, these fees could add about €23,000 to the cost of the home. And this is likely to be more than the cost of borrowing the money would have been at current rates, as a loan of €50,000 over 24 years would cost about €13,000 in interest based on a rate of 2 per cent.

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The charge can be paid in full every year, or via monthly instalments. It can also be deferred, but must be settled in the event of sale, mortgage switching, etc.

You can also expect higher solicitor fees, given that a legal agreement with First Home Shared Equity will need to be put in place in the same way that a legal agreement will be put in place for the mortgage loan facility. Moreover, it is recommended that applicants also seek independent financial advice, “and there may be a cost associated with this”.

Tricky to find a property

The aim of First Home is to target middle-income earners who would otherwise be priced out of the market, by boosting what they can afford through the equity stake. In turn, it is hoped, this will lead to a bump in supply of housing aimed at first-time buyers. But whether or not this will happen remains to be seen.

In the meantime, first-time buyers will likely struggle to find a property which will qualify for the scheme which has price ceilings “to reflect local market conditions, demand for housing, and incomes in each area”.

However, they don’t always make sense.

In Cork City for example, average house prices stood at €350,663 (southside) and €287,433 (northside) according to the Central Statistics Office in the year to May. Contrast this with Dún Laoghaire Rathdown in south Dublin, home to the State’s priciest properties, where the average price was €712,761 over the same period.

However, both areas have the same maximum price ceiling, of €450,000.

So while a Cork buyer could consider a new home at Richmond Rise in Glanmire (three-bed semis from €395,000) or Wayside in Bishopstown, where prices start at €330,000 for a two-bed (although the supply of new homes in Cork is also tight), in Dún Laoghaire Rathdown, buyers will struggle to find new homes for sale in such a price range.

At Brennanstown Wood in Cabinteely for example, a one-bed will start at €415,000, with two beds already in excess of the scheme’s cap, at €525,000.