Is the State becoming a subprime lender? This may be an overly simplistic view on the revamp of the local authority home loan scheme, which will now offer attractive fixed interest rates for the term of the mortgage to some borrowers who do not qualify for loans from banks.
But remember the very rationale of the scheme is to give loans to borrowers who cannot get them elsewhere and inevitably this involves risk on both sides.
Will the new scheme in itself contribute to rising house prices? More supply is the only real answer to the housing crisis and as the Government knows this takes time. Together with the help-to-buy scheme the risk in the short term is of creating more pressure on prices at a time when supply is still constrained.
The push and pull between the Central Bank rules and Government schemes is all a bit unsatisfactory. Rising house prices have moved homes out of the price range of many on average incomes. A key reason is that many do not qualify under the Central Bank's rules, which restrict lending for most borrowers to 3.5 times income. The latest scheme is effectively circumventing the Central Bank rules, basing its affordability "bottom line" on keeping repayments at no more than one third of disposable income.
Unnecessary risk
Will this expose the borrower and the lender to unnecessary risk? If the value of their property rises and the jobs market stays buoyant, then all may be well for those borrowing under the scheme.
If not, problems could emerge. Care is needed to ensure another generation of young borrowers are not stuck in properties that they cannot move on from.
And there are other questions, too. What will the cost of funding the scheme be? Will the State act like a normal commercial lender? And does it intend to hold on to the loans, or will it in time sell them on to other lenders to raise funds for further loans?
The initiative does highlight another point. Irish banks are still overcharging for mortgages and relying too much on short-term cashback offers to attract custom. They would be much better moving interest rates down closer to what the new scheme is offering and developing more longer-term, fixed-rate products to offer certainty to buyers.
