First Home Scheme – New Hope for First-Time Buyers
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Introduction
With the current state of the Irish housing market and the increasing reality for young people that they may never be able to afford a home of their own, Thursday's announcement by the Government concerning a new €400 million First Home Scheme[1] ("the Scheme") is welcome news. The Scheme forms part of the Government's Housing for All strategy and aims to bridge the affordability gap between what first-time buyers can afford and the price of a home. In this blog we take a deeper look at the operation of the Scheme.
Who is the scheme open to?
The Scheme is open to First-Time buyers. It is targeted at those who do not already possess and do not meet the minimum requirements or financial requirements to attain home ownership. As such, those who have bought or built a property in Ireland are excluded. There are exceptions to this as other qualifying home buyers include those affected by relationship breakdown and/or insolvency. As of now it is only available to those persons who are taking out mortgages from AIB, Bank of Ireland or Permanent TSB. Although only three lenders have signed up to the Scheme, it is anticipated that more will get on board once it proves itself efficient.
Operation of the Scheme
The Scheme is open to buyers of newly built houses and apartments in private developments. Its operation is relatively straightforward, providing buyers with part of the purchase price of their homes in return for an equity stake. This stake is capped with the value varying depending on whether or not the buyer is also availing of the Government's Help to Buy ("HTB") scheme. The Scheme can take a maximum of 20% of the equity of the property if participants are signed up to the HTB scheme and 30% if they are not.
One of the main benefits of the Scheme is that it provides participants with an option to buy out some or all of the Scheme's equity stake if they so desire. A maximum of two partial buyouts are allowed per year and they, as well as full buy outs, are based on the market value of the property at the time the buyout takes place. No payments are due by the buyers to the state under the Scheme, if the stake is bought out within the first five years. Thereafter, a service charge of 1.75% of the original equity provided is chargeable from years 6-16. This increases to 2.15% at year 16 and to 2.85% from year 30 onwards. This provides a good incentive for participants to buy out the Scheme's equity, if they have the means and resources.
When a participant decides to sell their home, he/she must redeem the outstanding mortgage from the proceeds of that sale and pay to the Scheme the portion of the sale proceeds that corresponds to the Scheme's equity.
Scepticism
As with everything around housing, there is some scepticism. Sinn Féin spokesman Eoin Ó Broin said the Scheme will continue to inflate house prices and labelled it a "pro-developer scam". However, the scheme is aiming to prevent market distortion by applying a price ceiling in each local authority area. The buyer will also be required to borrow the maximum mortgage available and then seek the shortfall under the Scheme to prevent those who can actually afford the house sought from applying. Given the above considerations it is not hard to imagine that the administration of the Scheme will be cumbersome.
Conclusion
It remains to be seen just what impact this Scheme could have. When giving the go ahead last year, the Central Bank did warn that, in the short term, the plan could increase house prices. The Scheme is aimed at a small percentage and, as such, it may not have as large an effect as commentators say.
However, any attempt to tackle the current housing crisis is welcome, and initial reaction suggests that this could be a vehicle for change and provide those who saw no hope of owning their own property with an opportunity to get onto the property ladder. Minister for Housing Darragh O'Brien described the Scheme as "the most significant intervention in housing in a generation". If it delivers what it hopes to, it could well be a game changer for first-time buyers.
More information on the Scheme can be found here.
Written by Neil Dineen and Michael O'Tighearnaigh.