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Ultimate Guide to the First Home Scheme

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The First Home Scheme an Ultimate Guide

In this guide, we answer all the questions about the First Home Scheme that you have but are afraid to ask. The scheme has now gone live.

Why Has the First Home Scheme Launched?

Darragh O’Brien, the housing minister, has spearheaded this initiative in response to those would-be buyers who are paying high rents but would prefer to be homeowners. Many buyers are locked out of the property market as the macro-prudential rules require them to put up a 10% cash deposit and also limits their total mortgage borrowings to 4 times salary. Saving a 10% deposit while paying eye-watering rents is almost impossible.

The Help to Buy Scheme goes some way to alleviating the deposit conundrum by offering buyers up to 10% of the value of a property back in a tax rebate up to a maximum of €30,000. So a purchaser buying a new-build property for €300,000 can fund the 10% deposit through a tax rebate, assuming they have paid this amount in tax.

However, if after multiplying their salary (or joint salaries for a couple) by 4, they still can’t afford a property, the renter is stuck. Enter the First Home Scheme. In such instances, the scheme will make up the shortfall, up to a maximum of 30% of the total price of the property in an equity loan (20% if the purchaser avails of Help to Buy). So now the buyer has the deposit sorted and with the FHS bolstering their total buying power, in theory they can go and purchase a new property. This means they are no longer at the mercy of the unforgiving rental market and can start paying down a mortgage instead of wasting money on rent each month. So the theory goes, but let’s take a closer look at the detail.

What is an Equity Loan?

The First Home Scheme (FHS) is a separate legal entity supported by the Department of Housing, Local Government and Heritage, along with the three main banks, AIB, BOI and PTSB. The FHS lends you the money and charges a service charge (from year 6 onwards) on this loan. In addition, the FHS takes an ownership stake in your property equal to the percentage of the property’s value that they have contributed. So if the FHS has put up 10% of the money via an equity loan, they own 10% of the property. This differs from a mortgage whereby the bank puts up the money and takes a charge on the property as a security but does not take an ownership stake in the property. If you sell a property that has a mortgage, you pay back the outstanding mortgage. If you sell a property that has an equity loan, the lender is entitled to their percentage of the sales price; if the price has gone up, you will pay back more than the initial loan i.e. the lender shares in the capital appreciation of the property. A bank lending a mortgage does not. Incidentally, if the value of the property goes down, the FHS shares in that loss.

Am I Eligible for the First Home Scheme?

The scheme is available to all first-time buyers of new-build properties. It is also available to people who previously purchased a property with a partner but that relationship has ended and no beneficial interest is retained in the property. Those who have sold or divested of a previously owned property as part of a bankruptcy / personal insolvency arrangement are also eligible.

Does the First Home Scheme Apply to Second Hand Properties?

Unfortunately not; only new-build properties are eligible. 

How Much Can I Borrow Under the First Home Scheme?

The maximum that you can borrow is 30% of the price of the property. It should be noted that if you participate in the Help to Buy scheme for the property you’re purchasing that the maximum that you can borrow as part of the First Home Scheme is 20% of the price of the property.  

What if I Can Afford the Property Without the Equity Loan - Can I Still Avail of it?

No - if your total mortgage approval plus your deposit are sufficient to purchase the property, you cannot avail of the loan. It is designed to make up a funding shortfall when the deposit plus mortgage approval is less than the purchase price of the property. You must max out your 4 times salary in your mortgage. Incidentally, the scheme cannot be used if you are availing of an exemption i.e. if you have been approved for more than 4 times salary for your mortgage, you cannot avail of the equity loan.

Are There Any Limits on the Price of the Property I Can Purchase While Availing of the First Home Scheme

There are limits on property price ceilings assigned to specific areas by the First Home Scheme. These can be referenced on their own website for the most up to date insight.

Do I Have to Pay Interest & Capital Repayments on the Equity Loan?

During the first five years, no interest is payable on the loan. From years six to 15, a service charge of 1.75% will apply. From years 16 to 29 a service charge rate of 2.15% will apply and from year 30 onwards, the rate moves to 2.85%. Unlike a typical mortgage however, the repayments are interest only i.e. no capital repayments are required. The scheme refers to these payments as a "service charge". Crucially, these service charges can be allowed to accrue on a simple interest basis i.e. the property owner, if they wish, can choose not to pay these charges as they fall due i.e. from year six onward, but rather allow them to build up and discharge them from the proceeds of sale when the property is ultimately sold. Both the cost of finance and the repayment terms are extremely attractive to the borrower and are not terms that would be available through any commercial lender.

Can I Buy Out the First Home Scheme’s Stake in My Home?

The First Home Scheme is loaning you money and takes an equity stake in your property i.e. if the First Home Scheme loans you 15% of the purchase price of the property, they own 15% of the property. You can buy out this percentage for cash at any stage. If you choose not to buy out the scheme’s equity in your property, you will be liable to pay the associated interest charges each month. If you sell the property, start to rent it out (it is no longer your principal residence), or die, then the equity share must be bought out immediately as well as any outstanding interest (service charge) balance.

Can I Sell My Property if I Avail of the First Home Scheme?

Yes you can but the First Home Scheme will be entitled to their percentage of the proceeds. If the FHS owns 17% of the property, 17% of the proceeds of the sale will accrue to the FHS.  

What if I Still Can’t Afford the Property even with the First Home Scheme

If your deposit plus your mortgage approval plus 30% of the purchase price (20% if using HTB) come to less than the total purchase price, then unfortunately you currently Can’t afford this property. 

Can I Avail of the Help to Buy Scheme in Addition to the First Home Scheme?

Yes, so long as you are a first-time buyer who is eligible for the Help to Buy Scheme, you can avail of it in conjunction with the first home scheme but the maximum you can borrow is reduced to 20% of the purchase price. For example, if you were purchasing a house in Dublin for €400k, you could receive the Help to Buy rebate of €30k towards the deposit of the property meaning that you would need to have €10k in savings to get to €40k (10% of purchase price).

Let’s suppose you had a joint salary of €80k. A lending institution would lend €280k (3.5 times salary) meaning you are €80k short. This is where the First Home Scheme comes in. The State would provide a €80k equity loan in return for a 20% equity stake in the property. So, a couple earning €80k with savings of €10k could buy a new house worth €400k. They would only technically own 80% of the property but would have full, unrestricted access to 100% of the property - the organisers of the FHS don’t show up at weekends looking for use of the property!

Is this a Good Scheme and Will it Solve the Housing Crisis?

Leo Varadkar says this his party represents those who get out of bed early in the morning. Some political parties in Ireland represent those who get out of bed angry in the morning. This cohort of Irish society are happiest when they are outraged. At times, they seem almost gleeful when rents and house prices go up. The deeper the crisis, the happier they are as it suits their political agenda i.e. the swapping of power back and forth between Fianna Fail and Fine Gael since the foundation of the State has only served the rich and working people have been increasingly marginalised. If one was looking for a single indicator as to how well thought out this scheme is, it is the silence of these perma-angry people about the scheme. Their silence has been deafening. It’s as if they parsed every line of the literature, searching, hoping, yearning to find something to criticise and when they couldn’t, they just ignored it. This silence tells us just how powerful this scheme is likely to be and how well thought out it is. There are no votes for those in opposition to acknowledge how much work and thought went into this by Darragh O’Brien and his team so instead, they just say nothing.

One criticism that people have latched onto is that there won’t be enough supply to deal with the new demand that the scheme will create and that may well be true in the short run. This is a demand stimulating scheme in that it gives people who previously had no ability to purchase the means to so do with help from the State.

Housing output has been creeping up over the last few years as the developers are finally beginning to stretch their legs albeit from a depressed base. While on its own this scheme of course won’t solve the crisis, it will certainly be of massive help to thousands of first-time buyers. The construction industry hasn’t been shy about suggesting solutions to government on how to help them deliver more output. With this scheme, Darragh O’Brien has called their bluff so to speak so it’s on them now to step up and deliver. I expect they will as builders want to build and will do so if a site is viable. That increased supply and the associated competition amongst developers will keep price inflation in check and ultimately, we should settle down to a healthy market in equilibrium where supply broadly matches demand, those in employment can buy a property and inflation runs at a steady low single digit clip. Mr O’Brien is to be saluted for the vision and work that went into this scheme.

Disclaimer:

While every effort has been made to ensure the accuracy of this guide, Auctioneera accepts no liability for any errors or omissions. Ensure to take formal advice before making any financial decision.