I raised the question of the indexation and the effect that indexation might have on the Bill and in particular what effect inflation rates will have on the borrower from the start and what his effective rate of repayment will be when and if it is indexed to inflation rates.
Housing Finance Agency (Amendment) Bill, 1982: Committee and Final Stages.
Section 1 agreed to.
SECTION 2.
Question proposed: "That section 2 stand part of the Bill".
On that point first of all, if the rate of inflation or the consumer price index, which is related to it, drops to a negative point or even if it drops a number of points, then the immediate effect will be that the bor-rower's repayments will drop as well. Does that answer the Senator's query?
In relation to the consumer price index number I am questioning the repayments that a person would make. When you relate inflation rate to the person's borrowings the consumer price index number has no relation to the inflation rate. The consumer price index is based on a price index on a number of items but is not related to inflation rate.
When the prospectus is published the people who invest money in the first instance will see the index which is being used to retain the real value of the money over the length time of the bond. What is proposed in this instance is the consumer price index, which is related to inflation. The net effect of it would be as follows. At the moment inflation is probably going to be something in the region of 13 per cent for the 12 months in which the first of these loans will be come due. The CPI in year one will determine the rate of repayment by the borrower in year two. So, if it is 13 per cent in year one, the repayments for the borrower will be a portion of the interest plus that 13 per cent inflation rate. Let us call that unit 50. If in the following year the rate of inflation continues to drop and that is expressed through the CPI and it drops from 13 per cent down to 11 per cent in year two, the repayments by the borrower in year three will be reduced in comparison to year two because the combined rate will be down from unit 50 to something lower than unit 50.
I accept what the Minister has said, but what he has said in effect is that a borrower will have no idea what his repayments are going to be.
That is not really true because there is an upper ceiling to how much the borrower will be paying. If you borrow the maximum, £27,000, supposing you are availing of the concession as a local authority tenant, then the maximum amount of your PAYE income, your P65 income, is no more than 18 per cent. If the real value of the repayments should be 20 per cent and you are only paying up to the ceiling, which would be 18 per cent, you will have a deficit against your total loan account of 2 per cent carried into the next year.
All of the projections and all of the actuarial considerations that have gone into this are based on the clear confidence that over a period of 20 years or 25 years, depending on the loan repayment period, you can even out the cycle between deficit in the earlier part of the repayment schedule and in the latter part where you come substantially into credit. We are really adjusting the end credit at the last ten years of the period of repayment against the deficit at the beginning.
There is no question that anybody who borrows under this scheme and who finds that the rate of inflation goes back up to 25 per cent or something very substantial will find himself caught with an enormous interest payment on his loan. We and the financial market are quite confident in relation to this. The whole purpose of this kind of loan is that it will not be as exposed as a building society loan where you have no such guarantee if the rate of interest goes up.
Is the Minister suggesting that over the period of the loan the purchaser will have a guarantee that the interest rate will not exceed 18 per cent? What is the position regarding somebody who borrows for a house which is valued at over £65,000, whose income is over £20,000 and who qualifies under this scheme for a loan because his income is over £20,000 and the value of the house is over £65,000?
To answer the second question first, somebody with an income of £20,000 would not be eligible for this loan.
Gross income.
I do not think so.
I would like to develop that one.
Could I answer that particular point? The normal qualification criterion for a loan is an income of £9,000. The maximum that you can borrow is three times your income. The maximum loan amount is £27,000 in special circumstances. The ordinary loan amount is £22,000.
Question put and agreed to.
Section 3 agreed to.
Title agreed to.
Bill reported without amendment, received for final consideration and passed.