Is shared equity a bridge too far?
In the face of an affordability crisis, first time buyers of new homes are being offered a cocktail of incentives to help them get on the property ladder, including the government’s Help to Buy and First Home schemes. Mel Reynolds asks: are these the solution to the affordability crisis?
This article was originally published in issue 46 of Passive House Plus magazine. Want immediate access to all back issues and exclusive extra content? Click here to subscribe for as little as €15, or click here to receive the next issue free of charge
What do the schemes offer?
The Help to Buy scheme (HTBS) allows up to a €30,000 lump sum tax rebate to be claimed by qualifying purchasers. There is no salary cap and mortgages must be a minimum of 70 per cent of the property value. To date, 42,000 buyers have availed of this measure.
The First Home scheme (FHS) allows buyers to ‘bridge the affordability gap’ with the state owning up to a 30 per cent ‘equity share’ in a new home, reduced to 20 per cent if the purchasers are also availing of the HTBS. There are a range of price caps depending on location, ranging from €325,000 in less expensive counties to €500,000 for apartments in Cork City and Co Dublin. A minimum 10 per cent deposit is required along with a maximum mortgage of four times one’s income. Since 2018, €590 million has been lent out under this scheme to 3,580 households.
In the sixth year of ownership under the FHS, if buyers haven’t fully paid off their equity share, a service charge will begin to accrue, starting at 1.75 per cent and stepping up to 2.85 per cent for year thirty. Owners can buy out all or part of the equity share at any time. The full amount must be redeemed under several conditions, such as if the property is sold or rented out. If prices continue to increase, what’s not to like? The best way to examine this is to look at a number of scenarios.
Case study A: second-hand home
A Dublin-based couple have a joint income of €70,000 and a €40,000 deposit. They can obtain the maximum mortgage and want to buy a second-hand home. They can’t avail of either the HTBS or FHS as the house is second- hand. Their maximum purchase price will be €320,000.
With an interest rate of 4.5 per cent, a thirty-year €280,000 mortgage will have monthly repayments of €1,419. At the end of the thirty years they’ll own their property outright. At time of writing, there are more than seven hundred advertisements online for homes for sale in Co Dublin for €325,000 or less, so there is plenty of choice.
Case study B: new home
The couple are tempted by the incentives on offer for new homes. In addition to their maximum mortgage of €280,000 and deposit of €40,000, they qualify for €20,000 under the HTBS, less than the maximum.
They also qualify for 15 per cent of the purchase price under the FHS, a €60,000 equity share. Their purchasing power increases by €80,000 and they can now buy a new home for up to €400,000.
But their choice is limited: In October 2023 there were just five new schemes in Co Dublin advertised with prices of €400k or less so it’s likely that their new home will be in the commuter belt.
With new home prices rising by 11 per cent per year the incentives may look compelling, but the devil is in the detail. There are two main components to the costs of buying a new-build: the mortgage and the ‘equity share’.
- The mortgage is straightforward. With an interest rate of 4.5 per cent, a thirty-year €280,000 mortgage will have monthly repayments of €1,419. After thirty years this debt is paid off.
- The shared equity is a bit more complicated. The FHS isn’t a mortgage, and the equity share goes up and down according to market values. Service charges will be due along with the equity. If the debt isn’t paid off early, service charges over thirty years in this case will be €30,270. At a low level +2 per cent price inflation per year, the equity amount increases to €108,630, and the total repayable will be €138,900 – equivalent to a 6.65 per cent thirty-year mortgage.
But this could be a lot more. If price inflation is +3 per cent per year, then the FHS equity share plus fees increases to €175,900 over the term, equivalent to a 9.15 per cent thirty-year mortgage. If buyers pay off the equity share within the first five years, no service charges apply. But if prices increase sharply in this period, the costs increase. If price inflation averages +8 per cent per year in the first five years, the FHS total due in year five is the equivalent of a whopping 16.3 per cent five-year loan.
Buy new or second-hand?
The shared equity scheme sounds great, but you need to look at the fine print: it may cost more in the short term when the market rises. The examples above suggest that if prices increase even marginally above inflation over a long period, the cost for a firsttime buyer of a new home with the aid of incentives versus a cheaper second-hand one could be €176,000.
Government requests for repayment down the line may result in owners being forced to refinance close to retirement age, or in selling to pay-off the equity share. Incentives that seem enticing now may end up costing thousands more in a few years. My advice is to think carefully and do your homework - look before you leap.
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