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GAZETTE
JULY/AUGUS
T 1982
Housing Finance Agency
Loans — a Caution
Criticisms of delays in implementing the Housing
Finance Agency scheme of house purchase loans
have tended to overshadow the inherent dangers of
the scheme for certain categories of borrowers. While
the risks which such borrowers took were mentioned
in the Society's newsletters, their primary purpose
was to alert solicitors to the difficulties which clients
who either could or could not get bridging finance
would face because of the long gap then existing
between approval and payment of the loans. Now
that this gap has reputedly lessened considerably, it
may be apposite to renew the warnings about the
inherent risks for such borrowers/ Repayments of
loans under the scheme differ radically from any
other house purchase mortgage scheme previously
operated in Ireland. The factors which determine the
amount of the annual repayments are:—
1. any increase in the consumer price index during
the previous year (interest is not to exceed the rate
of inflation plus 3.25%) and
2. the borrower's gross income in the previous year
(payments not to exceed 18% of such income).
The aim of the scheme is a desirable one, namely,
to reduce the burden of mortgage repayments in the
early years of the loan, but this inevitably means the
mortgage debt will rise. The agency has published an
example showing an original debt of £22,500
increasing to £58,000 in the 10th year and £101,358
in the 15th year. Using projections of average annual
inflation of 15% and average annual salary increases
of 16% over the period, the agency shows that the
ratio of the borrower's debt to his current income will
decline from the figure of 2.90 to nil over the 25 year
period.
Leaving aside doubts about the inevitability of
salary increases bettering inflation (and economists
have usually been rather better at pathology than
prophecy) is it necessarily true that there will be a
commensurate increase in house prices particularly
in the short term? If there is not, then it may prove
very difficult for a borrower to sell his house. Taking
the agency's calculations and assuming a purchase
price of £26,000 and a loan of £22,500, the borrower
would at the end of the third year have to repay
£31,647 to the agency and, therefore, to have the
same percentage of the sale price in his pocket as he
had of the initial purchase price would require to
achieve a selling price of £35,147, or an increase over
the three-year period of 40% over the initial price.
Present trends in house prices would not encourage
the belief that there would be such an increase.
What is certain, however, is that a borrower will
not be able to refinance the mortgage from a normal
source of mortgage finance. The most obvious case
would be a purchaser who is employed by an
institution with its own house mortgage scheme, but
who does not immediately qualify for the scheme by
reason of his short service with the institution. If he
qualifies for the scheme within a few years, he will be
faced with precisely the same dilemma as the
borrower who wishes to sell, namely, that he is not
going to be able to borrow enough under the usual
terms of such institution schemes to discharge the
loan to the Housing Fianance Agency. Even the
ordinary borrower who wishes to turn to a building
society or other similar institution for a long term
loan will almost certainly find that the amount
necessary to discharge the Housing Finance Agency
loan will be in excess of what he could borrow from a
building society.
These are points which should be clearly explained
to prospective borrowers from the Agency. The
Agency's own explanatory memorandum is in
general very fair, but it must be said that it could
perhaps improve its answer to hypothetical question
12 — "what happens if the borrower wants to sell the
house?" — the answer "this problem will be treated
in the same way as a conventional mortgage. The
borrower must redeem the outstanding loan, there
will be no special charge for this purpose" might
reasonably include some reference to the particular
situation created by the fact that there is no
repayment of debt in nominal terms for the first 18
years of the loan in the example supplied by the
Agency. •
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