Until recently, it was generally considered a given that someone who was divorced or separated, and who previously owned an interest in a home, could no longer be considered as a first-time buyer.
This made the process of buying a home for this cohort much more challenging, as it excluded such State-backed incentives as Help to Buy and the local authority home loan, as well as being treated more stringently under the Central Bank’s lending rules.
However, the Central Bank last month adjusted those lending rules and while much of the attention has been on the impact on first-time buyers, the regulator also made a change to how separated and divorced applicants should be treated when looking to buy.
Furthermore, buyers in that position are now also deemed eligible for some first-time buyer schemes – the local authority home loan and the First Home Scheme – but not Help to Buy.
It’s part of a broader “fresh start” approach from Government, a concept introduced last year, which aims to recognise “the reality of the world we live in”, according to Minister for Housing Darragh O’Brien. It means that people who are divorced or separated and no longer have any interest in the family home, or who have undergone personal insolvency or bankruptcy arrangements or proceedings or other legal processes, are now eligible to apply for a host of State-backed schemes.
It’s certainly an improvement but, as will become clear, further changes may yet be warranted.
Until recently, people who were divorced or separated were treated as second-time buyers by lenders when it came to buying a home (assuming they had previously owned one).
Previously, someone buying a house for €300,000 were limited to borrowing 80 per cent [which equates to a deposit of €60,000] – so that was €30,000 in additional savings they needed
— Joey Sheahan, of MyMortgages.ie
On the one hand, this makes sense, because they were in fact second-time buyers. On the other however, it made what was a difficult situation for many even more difficult. This is because second-time buyers had to save a higher deposit of 20 per cent to fund home purchase, while they were also restricted by the 3.5 times earning rule.
An easing of the Central Bank rules means that the 10 per cent deposit rule has been extended to people getting back on the housing ladder, divorced/separated applicants will also be able to borrow four times their salary, more than the 3.5 times which is the limit for everyone bar first-time buyers.
As Joey Sheahan, of MyMortgages.ie says, the move is a “game-changer” for this cohort.
“That’s a significant change when you consider that, previously, someone buying a house for €300,000 were limited to borrowing 80 per cent [which equates to a deposit of €60,000] – so that was €30,000 in additional savings they needed,” he says.
Now, a divorced or separated buyer will have to save only half as much – or €30,000 – to buy that home and they will also be able to borrow four times their income.
So, last year, such an applicant on a salary of €60,000 could borrow only €210,000 (unless they were granted an exemption). Now they can borrow €240,000.
When working out how much they can borrow, Sheehan says it’s important to consider what the lender will take as income.
“This can vary significantly from one lender to another. Some lenders will allow only the applicant’s basic salary, whereas others will include some or all additional income such as car allowance, bonuses, overtime, shift allowance, commission, etc, and will allow borrowings of four times that higher income amount,” he says.
The Central Bank is not the only one that has changed its approach of late.
While the local authority home loan, which was formerly known as the Rebuilding Ireland Home Loan, has had a mixed response, recent enhancements may mean it will reach a larger audience – including divorced/separated buyers.
The loan, which can be used to buy a new, second-hand or self-built home, is aimed at first-time buyers who may not be able to access finance in the traditional market, and comes with the option of two fixed rates: 3.35 per cent fixed for up to 25 years (APR 3.4 per cent); or 3.45 per cent fixed for up to 30 years (APR 3.51 per cent).
Rates for the loan have increased from the 2.5 per cent prevailing when it first launched. Depending on future interest rate trends, these may look like very good value – or may end up being considerably higher than market rates. That’s something that is impossible to predict.
You can borrow up to 90 per cent of the purchase price of the property, so a deposit of just 10 per cent is needed.
There have been criticisms of the scheme in the past, mainly centred on the high mortgage protection cover that must be taken out in conjunction with a loan. For example, there were just 30 mortgages drawn down under the scheme in Dublin city in 2022, at an average value of about €200,000. Meanwhile in Cork city, there were no applications – and thus no mortgages drawn down – last year.
Overall, since February 2018, more than 3,300 people have got on the property ladder through the loan.
The protection cover needed has also changed recently, according to a spokesman for the Department of Housing, Local Government and Heritage. Applicants no longer need to get life and disability cover: from the start of this year, life cover is seen as sufficient, and this has resulted in a “substantially reduced premium” for new borrowers, says the spokesman.
Other enhancements mean that more potential buyers – divorced, separated or otherwise – will qualify as first-time buyers as, since January 1st of last year, the “fresh start” approach applies to the local authority home loan.
Moreover, the prices of homes eligible for a local authority home loan scheme and income limits on those eligible to apply for a loan, are being increased. From later this week – March 1st – a property in Dublin, Wicklow or Kildare priced at €360,000 will be eligible for the loan, up from €320,000 currently.
In Galway, Cork, Meath and Louth the figure will rise from €310,00 to €330,000; from €250,000 to €300,000 in Limerick, Waterford, Clare, Wexford, Westmeath, Kilkenny; and from €250,000 to €275,000 in the remaining counties.
Moreover, borrowers with higher salaries will also now be eligible for the loan, as the limits for single buyers (which includes those separated/divorced with no interest in a property) will increase from €50,000 or €65,000, depending on location, to €70,000 for all single applicants.
Based on a 10 per cent deposit then, someone who is divorced and earning the maximum of €70,000, may be able to borrow €280,000 towards the purchase of a €311,111 home in Dublin.
As with the local authority home loan, the “fresh start” approach also applies to the recently introduced First Home Shared Equity Scheme, which means that those who are divorced/separated may also be treated as a first-time buyer and thus qualify for shared ownership.
The aim of the scheme, which launched last year, is to target middle-income earners who would otherwise be priced out of the market. This is done by boosting what they can afford, with the State taking an equity stake, of up to up 30 per cent in the property.
So if a house is selling for €350,000, the State will take a stake of as much as €105,000 (30 per cent), leaving the homebuyer €245,000 to fund themselves. While the State’s stake does not have to be repaid, if it isn’t, applicants will have to start paying fees on it from year six.
The State’s stake is a percentage of the value of the property, so it moves in the same direction as property prices. This means after six years, you could owe more – or less – than the initial value.
The scheme has recently been enhanced with the aim of allowing more first-time buyers qualify. This means that houses eligible for the scheme can now be valued at up to €475,000 (depending on location), with apartments at up to €500,000.
It is, however, a complicated product, and shouldn’t be entered into without careful consideration given. An argument against its introduction is that it simply inflates property prices, and thus doesn’t really help homebuyers
Another challenge is finding a home that fits the criteria; Cork city, for example, has a price ceiling of €500,000 for an apartment, but you won’t find one advertised currently on either myhome.ie or daft.ie.
