I move: "That the Bill be now read a Second Time."
The objectives of this Bill represent a radical change in housing policy. Under the Bill, I intend to introduce a pilot scheme which will provide an option to purchase to many people who simply cannot obtain adquate mortgages at present.
The Bill will provide the statutory framework under which a company, to be known as the Housing Finance Agency, will operate. The company will be established soon after the Bill becomes law. I would welcome the support of Deputies on all sides of the House for this Bill. I think that it is imperative that the Bill should be enacted in the current session.
The primary purpose of the agency is to raise additional finance for housing mortgages on a self-financing basis. In its first year of operation, it is intended that the agency will raise some £25 million to £50 million for these mortgages. This money will be obtained mainly by selling State-guaranteed bonds, linked to the rate of inflation and having a small real rate of return, to the operators of pension funds and life offices. A first-time purchaser of a new or an existing house, with an annual gross income of up to £9,000 in the previous tax year may obtain an ordinary loan of up to £22,500 and up to £27,000 in special cases. The amount of the loan in any case may not exceed three times the borrower's annual gross income in the previous tax year and 90 per cent of the net value of the house.
The borrower will be charged an index-linked mortgage rate, taking into account the real rate of return to the bondholder and administrative costs. To ensure that a borrower will not be required to make excessive repayments in any year, actual loan repayments under the new scheme may be made on a pay-related basis. Where a person borrows three times his gross income in the previous tax year, he may repay the loan over a period of about 25 years on the basis of 18 per cent of the gross income in the previous tax year, which would be equivalent to about 15 per cent to 16 per cent of current earnings, based on recent experience. Where a person borrows less than three times his income, the proportion of pay taken in repayments may be less. It is intended that individual loan applications will be processed by local authorities who have successfully operated the traditional house purchase loan scheme for more than 80 years.
A scheme providing for tapping institutional funds in order to give loan assistance to first-time purchasers was first mooted in a policy document published by Fine Gael in October 1980. An outline of the proposals was also contained in the party's policy document of last May and in the Programme for Government 1981-1986, announced on 28 June 1981. The proposals in these policy documents were based on the premise that there is a need to provide a new source of finance. I am satisfied that the existing sources of mortgage finance are not able to cope with the extra demand for loans. Furthermore, if a person with an annual income of £9,000 borrows £22,500 over the typical 20-year period from a building society in respect of the purchase of an existing house, his gross repayments in the first year, at current interest rates, would amount to £3,846, representing 43 per cent of his income. This is patently unsatisfactory.
As regards raising money for the new scheme, the Government have decided to adopt a radical approach by providing in the Bill that the new agency may issue index-linked bonds having a real rate of return of such amount as may be approved by the Minister and the Minister for Finance. Initially, it is intended to issue the bonds to pension funds and life offices only. The issue will be on an auction or tender basis as regards the amount of the real rate of return. The manner of repayment of both principal and interest will be decided by the Minister and the Minister for Finance. It is proposed to make provision for a market in the bonds, but for the time being, this will be limited to the pension funds and life offices. It is entirely appropriate that the agency should be funded mainly by these sources; the terms of the bond issue will safeguard the investments made, mainly by small savers, in these institutions.
Under section 5 of the Bill, the agency will be empowered to make loans to individual borrowers. It is proposed, however, that within the foreseeable future, local authorities may operate the loan scheme either on the same broad basis as they obtain money from the Local Loans Fund or alternatively, they may act as agents. There would be no point in arranging for the agency to set up a local branch network when 41 local authorities already efficiently administer house purchase loan schemes throughout the country. In general, the new scheme is aimed at helping mainly the marginal house purchasers, or in other words, first-time purchasers earning up to £9,000. This new limit relates to the gross income of the borrower, excluding the spouse's income, in the tax year preceding the date of application. Many of these people find it difficult to obtain loans from other lending agencies. Persons qualifying under the existing local authority loan scheme will be allowed the option of repaying their loans in accordance with the proposed terms. It is envisaged that, at full operation, this new scheme will replace the local authority loan scheme. Under the new scheme, the maximum loans available from public funds will be increased very substantially. In ordinary cases, the agency scheme will enable loans of up to £22,500 to be made, compared with £14,000 under the existing scheme. Special categories of borrowers, such as a tenant of a local authority house surrendering the tenancy of his house and buying a private house, may now qualify for a loan of up to £27,000, compared with £18,000 under the existing SDA scheme. In the case of houses on certain islands off the west coast, the maximum loan is also being increased to £27,000. In the case of a loan for the acquisition of a house, the new limits will apply where the contract is not made before today. In the case of a loan for the construction of a house, the new limits will apply where the foundations were not completed before today. The new limits will be kept under review.
I think that the development of housing co-operatives should also be assisted. In an effort to promote activity by these voluntary bodies, the Government have decided that, where a bona fide housing co-operative builds houses on sites provided either by housing authorities or by the co-operatives directly, members of the co-operative who have annual incomes of up to £9,000 or are local authority tenants can qualify for loans of up to £27,000 under the new scheme, provided that at least 80 per cent of the new householders are otherwise eligible for house purchase loans under the scheme.
Loans under the scheme will not distinguish between new and existing houses. Furthermore, loans will not be confined to married persons and persons about to marry. One other important development is that a loan applicant will not, as in the case of SDA loans, be required to prove that he cannot obtain a house purchase loan from commercial agencies. While the loan will normally be restricted to first-time purchasers, loans will also be available where a home-owner wishes to buy a bigger house because his existing house is unfit or overcrowded. Loans will be made where a home-owner is obliged to obtain alternative employment in another area and wishes to buy a house there. In particular, a key industrial worker moving into an area will be facilitated.
As I mentioned earlier, actual loan repayments under the new scheme may be made on a pay-related basis. Where a person borrows three times his gross income in the previous tax year, he may repay the loan over a period of about 25 years on the basis of 18 per cent of the gross income of the principal earner in the previous year. This proportion may be reduced to 16 per cent, 14 per cent and 12 per cent where the amount borrowed represents 2½, 2 and 1½ times, respectively, of the borrower's gross income in the tax year prior to his application. The pay-related approach to loan repayments will usually result in the amount of the principal outstanding increasing in nominal terms in the early years but in case there may be any misunderstanding, it must be emphasised that the amount of the principal outstanding under the proposed system normally declines in real terms when inflation is taken into account.
The essential feature of the new scheme is the way in which the real burden of loan repayments will be spread evenly over the duration of the loan. This feature will give access to home ownership to many for whom the extremely high repayments burden in the first few years of a conventional annuity mortgage is an effective deterrent.
In addition, the scheme will protect the borrower against the short-term effects of a loss of income due, for example, to sickness or unemployment, in that repayments required in any particular year may be restricted to the proportions of income to which I have referred, with the shortfall being made good in later years by the lengthening of the repayment period, if necessary.
The total repayments will be calculated to ensure that the agency are self-financing, taking one year with another. Thus, they will be based on the agency's total costs, including the cost of servicing the index-linked debt. It is not possible to say for certain whether borrowing will in the long run prove to have been more or less expensive than borrowing on a conventional annuity mortgage. That will depend on the evolution of inflation and mortgage interest rates in the decades to come. In Ireland, mortgage rates exceeded inflation rates for part of the sixties, while the reverse situation has obtained for most of the seventies. The upward trend in interest rates in the last year or so has resulted in the mortgage rate exceeding the inflation rate in many countries. In Ireland, while inflation rates generally are relatively high at present and may remain so for another year or two, the Government are determined to curb inflation rates in the next few years.
During the period 1973 to 1980, increases in average annual industrial earnings exceeded the rates of inflation by 3 per cent. While increases in earnings are likely to be less than the inflation rate during the next year or so, earnings are likely to grow in real terms in the long run.
In any event, of course, repayments will cease when the total amount required to cover the agency's costs have been repaid, even if this is long before the originally envisaged maturity date. Where a person qualifies for the mortgage subsidy of £3,000, it is intended that the borrower will transfer the subsidy payments to the lender, thereby reducing the amount of the loan outstanding and shortening the repayment period.
In order to cut red tape, this scheme generally disregards the income of a spouse. Borrowers will be free to make repayments over and above the specified proportions of income at any time if they so desire. This will reduce the capital debt outstanding at that time and shorten the repayment period.
Under section 6 of the Bill, the Minister will be empowered to issue formal general policy directives to the agency, with the consent of the Minister for Finance. The agency will, of course, be primarily responsible for formulating policies, but it may be necessary for the Minister from time to time to issue directives which relate to social and economic aspects of the agency's work. Under section 14 of the Bill, the agency will be required to meet their costs from their operations, taking one year with another.
As regards the detailed provisions of the Bill, I should like to refer Deputies to the Explanatory Memorandum which I have circulated and add a few brief comments at this stage.
A substantial part of the Bill relates to technical provisions which apply to most State-sponsored companies. Section 2 provides for the formation and registration of the company. Under section 3, the share capital will be £100 and this capital cannot be increased or reduced without the consent of the Minister for Finance. Section 4 refers to the memorandum and articles of association and sets out key objectives of the company.
I have already referred to section 5 in some detail. Subsections (3) to (8) are very technical and are based on the corresponding provisions of section 39 of the Housing Act, 1966 relating to the existing local authority loans scheme.
I have already referred also to section 6. Sections 7 to 9 are fairly standard provisions relating to the taking up of shares by the Minister for Finance, his rights as a shareholder and the disposal of any dividend and so on arising from such shares.
The Minister for Finance occupies a central role relating to the capital and shares of the company. I have in mind that the board of directors would be drawn from persons with relevant experience in the commercial and public service.
Section 10 enables the agency to borrow money up to a limit of £200 million; in the first year, borrowing may be of the order of £25 million to £50 million. In particular, the agency may issue bonds. Section 11, which is a standard provision, empowers the Minister for Finance to guarantee borrowings; this would enable the agency to issue State-guaranteed bonds. By virtue of section 10, guarantees will also be limited to £200 million.
Sections 12, 13, 15, 17 and 18 are standard provisions.
I have referred already to section 14 which requires the agency to be self-financing. Under section 16, any transfers of bonds, debentures and other securities issued by the agency will be exempt from stamp duty in the same way as transfers of certain loan stocks. Before I conclude, I should say that I expect that applications for loans under the new scheme will be accepted within about six weeks. The first bond issue will be made within about three months.
I commend the Bill to the House.