Analysis of Help to Buy Scheme for FTBs of new houses

[Brendan Burgess]

First Time Buyers Income Tax rebate

How it works

• new houses only
• first time buyers only
• Must be borrowing at least 80% of the value of the house
  
• an income tax rebate
• Maximum rebate €20k
• Maximum price of house: €600k
• 5% of the value of the property up to a maximum of €20k.
  • A €200k house will get €10k
  • A €400k house will get €20k
  • A €600k house will get €20k
  • A €601k house will get nothing.
• Applies to people who have signed contracts on or after 19 July.
  
• Ends at end of 2019

The mechanics have not been worked out, but I presume that they will get the rebate sometime before exchanging contracts and closing the sale

Let’s look at a house selling for €200k

At present, a buyer needs a deposit of €20k or 10%.

Assuming, for the moment, that house prices don’t increase, they will need savings of only €10k because the government will provide the other €10k.

Won’t builders just push up the price by 5%?

Let’s assume the worst possible outcome. And that the price of the house goes up to €210k.

Now the First Time Buyer is no worse or no better off, as the price has increased by the amount of the rebate.

They will need a deposit of €21k which they can now achieve with savings of €11k + €10k rebate.

So they are better off in that they can buy the house sooner.

Is it that bad a thing if builders increase their profit by €10k?

If building is more profitable, then more houses will be built.

The key objective should be to increase the supply of housing and this measure will be a small help in that direction.

The danger is that it might push up the prices of new houses by a lot more than the €10k!

It’s hard to forecast the impact on house prices.

But a lot of people who would have been expecting to have the deposit saved in a year or two, may well be in the market now as the rebate gives them the 10%.

That could throw a wall of money at new houses. Given that there are very few new houses available, this could push the prices up by more than the 5%.

So FTBs may end up with bigger mortgages, but at least, they would be getting on the housing ladder earlier.

Was this necessary?

Probably not. The Central Bank study last week showed that people on average to good incomes could save the deposit within 4 years.

They don’t really need help.

Would a reduction in VAT have been better?

The government gets 12% of the selling price in VAT which is €24k. (13.5% of €176k net sales price)

They will be refunding 5% or €10k.

If they had reduced VAT by €10k and if builders had kept it, the FTB would be no better off. They would still need 10% of €200k.

A VAT reduction would have also been passed on to second time buyers and investors.

The government would have had to get approval from the EC for a VAT reduction.

At least it is restricted to new houses.

Fianna Fáil had called for it to apply to second hand houses as well. That would have been no help.
It would have had an insignificant impact on the building of new houses and would have just pushed up prices for everyone including trader-uppers who would not be getting the grant.

Why restrict it to people borrowing at least 80%?
House price: €200k
Help to buy: €10k
I must borrow at least 80%: €160k
Maximum deposit: €30k

So if I have saved up €50k, I just use €30k when I draw down the mortgage and pay down the mortgage after I have received the rebate?

The problem is that 80% is a key point in determining Loan to Value mortgage rates. So, for example, KBC charges someone borrowing 80% a rate of 3.65% and someone borrowing 79% a rate of 3.2%.

And, apart from Ulster Bank, all the banks set the rate on the original LTV. So bringing the LTV down to 70% after you draw down the mortgage won't reduce your rate.

Not sure about this. OK, it rules out cash buyers, but how many FTBs are there?

Many people aim to borrow just below the 80% mark to get the lower mortgage rate.

I presume that this can changed in the Finance Bill. It should be changed to 75%.

Maybe it should just be scrapped as people can get around it anyway?



Is this not just a way around the Central Bank rules?

The primary purpose of the Central Bank rules is to stop the banks from reckless lending.

The lender’s position is not changed. They are still only giving out 90% LTV.

It does not affect the rules for second time buyers or first time buyers of second hand homes.

Unintended consequences

· The prices of new houses may well rise by a lot more than 5%

· First time buyers will have an advantage over second time buyers – not sure if that is a good thing or not.

· It could make it difficult for people trading up to sell what was their starter homes. First Time Buyers will no longer be interested in them as they would not get the rebate.

 

[Brendan Burgess]

See Appendix from Budget 2017 document


This Help to Buy incentive is aimed at assisting first time buyers of new homes to fund the deposit
required under the Central Bank macro-prudential rules. It will also assist those looking to build
once-off houses for their own occupation.

The amount of rebate available to an applicant is calculated based on their total income tax
(including DIRT) paid over the previous four tax years. No refund of USC will be available.

In order to qualify, applicants must take out a mortgage of at least 80% of the purchase price, or in
the case of a self-build, 80% of the valuation approved by the mortgage provider. Individuals who
are in a position to avail of a mortgage at a lower loan to value ratio than 80% already have sufficient
resources to more than meet the deposit requirements of the macro-prudential rules and thus are
less in need of assistance from the Exchequer.

This incentive will be open to applicants who have signed contracts to purchase their home on or
after 19 July 2016. In the case of a self-build, applicants who drew down the first tranche of their
mortgage on or after 19 July 2016 will also be eligible.

In line with the Central Bank macro-prudential rules, a joint purchase between a FTB and a non-FTB
will not be eligible for the incentive.


Self-builds are included in the incentive, although they still must meet all the other conditions as
set out by the incentive, including the requirement to take out a mortgage of at least 80% of the
valuation of the property.

Example 7
Tom and Mary signed a contract to purchase a newly built home off the plans in May 2016. Neither
of them have purchased a property before. They paid the deposit on the house at the time of
contract signing but the developer is still constructing the estate and they have not moved into
their new home. As they signed the contract to purchase their property prior to 19 July 2016, they
will not qualify for the Help to Buy incentive.