162 / 346
GAZETTE
JULY/AUGUST 1983
Practice Notes
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 capital
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
154
purchaser who is enployed 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 Finance 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. •
Editorial note: it has been suggested that the warning contained in this
article, which was published in the Gazette of December 1982, is of such
importance as to warrant its re-publication.
Conveyancing Note
V.A.T. on lending institutions
solicitors fees:
Change of Practice.
The Principal Inspector of the Dublin V.A.T. District
has made a ruling that Lending Institutions Solicitors are
not entitled to issue V.A.T. Invoices to Borrowers or
their Solicitors in respect of fees for the taking up of
documents or the preparation and completion of
releases of Mortgages. The Revenue's view is that the
Lending Institutions' solicitors' contract is with his client
and he is therefore entitled only to issue Invoices to that
client.
Accordingly, the V.A.T. Invoice must b : issued by
the Lending Institutions Solicitor to the Lending
Institution and the amount of the V.A.T. can only be
included in the total fee charged to the Borrower or
Borrowers Solicitor and should not be set out
separately.
This reverses the recommendation made by the
Conveyancing Committee in the March, 1983 Gazette.
•