State-backed equity scheme offers fresh hope for first-time buyers 

Scheme aims to bridge affordability gap by providing buyers with part of the purchase price of their home in return for a minority equity stake

The BPFI believes the scheme will make a real difference for the people who can benefit from it.

As part of its ‘Housing for All’ strategy, the Government has introduced a state-backed equity scheme designed to help would-be homeowners to take the first step on the property ladder. They’re calling it the ‘First Home Scheme’

This €400m affordable purchase scheme was designed in conjunction with mortgage providers and Banking and Payments Federation Ireland (BPFI). It aims to bridge the affordability gap by providing buyers with part of the purchase price for their home. In return, the State will take ‘a minority equity stake’ in the home.

The maximum stake that the scheme will take is 20%, if the buyer is also availing of the Government’s separate Help to Buy scheme, and 30% if Help to Buy is not used. More about that later.

The First Home Scheme application process runs in parallel with the mortgage application process, but is separate to it, so if you’re thinking of applying for the scheme, you’ll have to continue to go through the bank’s mortgage application process at the same time.

As it stands, three banks are taking part: AIB (including its EBS and Haven Mortgages businesses), Bank of Ireland, and Permanent TSB. It’s expected that other mortgage providers will join the scheme in the coming months.

It’s open to buyers of newly-built houses and apartments in private developments and is expected to cover the purchase of some 8,000 homes over the next four years.

Brian Hayes is CEO of Banking and Payments Federation Ireland. He says that the First Home Scheme is the product of strong and constructive collaboration "between all of its stakeholders, all with the shared aim of helping people get on the property ladder".

"We think this scheme is capable of making a real difference for the people who can benefit from it and we look forward to seeing it achieve its aims in the months and years ahead," Mr Hayes said.

So how does it work?

Suppose you’re a first time borrower with an income of €70,000. Under current central bank rules, the most you can borrow is 3.5 times your income, which comes to €245,000. That’s not going to get you very much in the current market.

If the property purchase price is €350,000, you’ll need a deposit of 10%, which is €35,000. Let’s assume too that you take advantage of the Help to Buy, which thereby limits the equity the Government can take in the new house to 20%.

If you get no further support, the most you can pay for this house is €280,000, which is the €245,000 the bank will give you plus the deposit of €35,000.

So the affordability gap is €350,000 - €280,000 = €70,000.

The First Home Scheme can provide that €70,000 in return for a 20% equity stake in the property.

While there are exceptions, you must be a first-time buyer to be eligible for the scheme. A first-time buyer is defined as a person who has not previously purchased or built a dwelling for their occupation in Ireland, and who "does not own or is not beneficially entitled to an estate, or has interest in any dwelling in Ireland or elsewhere".

Applicants must also have a right to reside in Ireland, and must be aged 18 or over.

Applicants may also be eligible despite previously purchasing or building a property in Ireland if they did so with a spouse, civil partner or partner, and that relationship has ended.

In that case, the applicant must not have a beneficial interest in the previous property, or else they must have sold it as part of a personal insolvency or bankruptcy arrangement, "or other legal process as a consequence of insolvency".

Applicants must also have mortgage approval from a participating lender, they must have the 10% deposit, and they must be borrowing the maximum amount — the aforementioned 3.5 times income. Note too that some mortgage providers may be in a position to offer you in excess of 3.5 times your income. If you take advantage of that offer, you won’t be eligible for the scheme, so weigh everything up carefully before you opt for one or the other.

Joint applications are possible, but both parties must be first-time buyers.

You also need to be aware of the property price ceilings that are in place. These vary from one local authority to another, so check out the firsthomescheme.ie site to find out what they are in your area. These ceilings will be reviewed early next year, and at regular intervals after that to make sure they get the balance right between preventing market distortion and ensuring that the scheme is effective.

When a first-time buyer who has bought a home using the scheme subsequently decides to sell it, they will be required to use the sale proceeds to redeem the outstanding mortgage and pay the scheme the portion of the sale proceeds that corresponds to the scheme’s equity stake.

For example: Suppose you bought the house for €350,000 and under the terms of the First Home Scheme, the Government provided €70,000 to bridge the affordability gap, and took a 20% stake in the house. If you then sell the house for €400,000, you’ll have to pay the scheme 20% of that, which is €80,000.

Scheme users have the option, but are not obligated, to buy out some or all of the equity stake at any time.

Scheme users will have the option, but not the obligation, to buy out some or all of the First Home Scheme equity stake at any time, if they wish and have the resources to do so. A maximum of two partial buyouts are allowed per year. Partial or full buyouts are based on the market value of the property at the time the buyout takes place.

No other payments are due to the First Home Scheme if the equity stake is bought out in the first five years of ownership. From year six onwards however, scheme participants will be liable for a service charge starting at 1.75% of the euro value of the original equity provided by the First Home Scheme. To clarify: they must pay simple interest of 1.75% of the portion of the purchase price that was provided by First Home, not 1.75% of the total purchase price. This service charge will increase to 2.15% from year 16 and to 2.85% from year 30, if it’s still applicable.

Homeowners will have the option of paying this charge each year or deferring the payment until the property is sold.

Note too that if you’re applying for the First Home Scheme, you can also apply for the Government’s Help to Buy scheme. This is another incentive for first time buyers, which is specifically designed to help would-be purchasers with the deposit for a self-build or a new house or apartment. There’s no money up front. If you meet the conditions, you’ll receive a refund on income tax. There are a number of other conditions — for more information see revenue.ie.

To restate: under the First Home Scheme, you can apply for equity support of up to 30% of the purchase price of the home unless you’re also applying for the Help to Buy scheme, in which case, the maximum available is 20%.

Applications can be made at First Home Scheme.