I have a few copies only of my text as the Bill only came through the Dáil at a very late hour last night.
The purpose of this Bill is to help many people who cannot obtain adequate mortgages at present to buy homes of their own. It 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.
The intention is that the agency will raise finance for housing mortgages on a self-financing basis. The funds will be additional to the money which otherwise would be invested in housing. In its first year of operation, the agency will raise £25 million to £50 million for these mortgages 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 qualify for a loan of up to £22,500. However, this sum will be increased to £27,000 in special cases. The amount of the loan will be up to three times the borrower's annual gross income in the previous tax year or 90 per cent of the net value of the house, whichever is less.
The borrower will be charged an index-linked mortgage rate, taking into account the real rate of return to the bondholder and the administrative costs of the scheme. His actual loan repayments will be made on a pay-related basis. For example, a person who takes out a mortgage equivalent to three times his gross income in the previous tax year may repay the loan over a period of about 25 years by annual instalments, each equal to 18 per cent of his gross income in the preceding tax year. Taking recent trends in wage levels into account, this would be equivalent to about 15 per cent to 16 per cent of his current earnings. Where the loan is less than three times the borrower's income, the proportion of his pay taken in repayments may be less than 18 per cent. The individual loan applications will be processed by local authorities by way of a graft on to their traditional SDA house purchase loan schemes.
The idea of tapping institutional funds in order to give loan assistance to first-time house purchasers was put forward in a Fine Gael policy document published in October, 1980. The proposals were also included in the party's policy document of last May and in the Programme for Government 1981-1986. The reason underlying the new concept was the realisation that there is a need to open up some new source of house purchase finance because the existing sources of mortgage finance cannot meet the present demand for loans. The point is relevant also that if a person earning £9,000 a year borrows £22,500 from a building society over 20 years to buy an existing house, his gross repayments in the first year, at current interest rates, would be £3,846, or 43 per cent of his income. This is a tremendous burden.
The Government have adopted a radical approach in funding the new scheme by providing in the Bill that the new agency may issue index-linked bonds having a real rate of return approved by the Ministers for the Environment and Finance. At the outset the bonds will be issued only to pension funds and life offices and 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 principal and interest will be decided by the Ministers. Provision will be made for a market in the bonds, but for the time being, this too will be confined to the pension funds and life offices. Senators will agree that it is 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.
While section 5 will authorise the agency to make loans to individual borrowers it is intended that for the time being local authorities will draw money from the agency and operate the scheme at local level. Obviously there would be no point in arranging for the agency to set up a local branch network corresponding to those operated by building societies when 41 local authorities already efficiently administer house-purchase loans schemes throughout the country.
In general, the new scheme is intended to help marginal house purchasers, that is first-time purchasers earning up to £9,000 a year. This limit will be 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 SDA loan scheme will be given the option of repaying their loans in accordance with the proposed terms. In the course of time it is envisaged that the new scheme will prove so attractive to intending house purchasers that it could completely replace the present 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 the present maximum loan of £14,000 under the SDA 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, will qualify for a loan of up to £27,000, compared with £18,000 available to him under the SDA scheme. The special maximum loan will also apply to the purchase of houses on certain islands off the west coast. In the case of a loan for the acquisition of a house, the new limits will apply where the contract is not made before 16 December. In the case of a loan for the construction of a house, the new limits will apply where the foundations were not completed before that date. The new limits will be kept under review.
It has been the firm policy of the Government to encourage the development of housing co-operatives. As a positive indication of this policy and in order 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 be advanced for the purchase of both new and existing houses and it is intended that the scheme will be open to both married persons and persons who are not married. Furthermore, an applicant for a loan 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 transfers to employment in another area and wishes to buy a house there. In particular, a key industrial worker moving into an area will be facilitated.
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 his gross income 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, 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, I want to emphasise that the amount of the principal outstanding under the proposed system normally declines in real terms when inflation is taken into account.
It is necessary for me to emphasise this fact because it was clear from the reactions of some Deputies when the Bill was being debated in the Dáil that they had failed to grasp the implications of this aspect of the scheme. In absolute terms the amount due by a borrower will increase — substantially so in some cases — in the earlier years of a loan. But all the time his income and the market value of the house are increasing to the extent that he is safeguarded against any major loss in the event of his being obliged to dispose of the house.
The outstanding feature of the new scheme is the way in which the real burden of repayments will be spread evenly over the duration of the loan. This will make it possible for many persons to become home owners who otherwise could not undertake the extremely high repayments burden in the first few years of a conventional annuity mortgage.
Another feature of the scheme which will be generally welcomed is that it will protect a borrower against the short-term effects of a loss of income due, for example, to sickness of 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 is self-financing, taking one year with another. For this purpose they will be based on the agency's total costs, including the cost of servicing the index-linked debt. At this early stage it would not be practical to predict if 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 trends in inflation and mortgage interest rates in the future. For example, mortgage rates exceeded inflation rates for part of the sixties, while the reverse situation 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 some other 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 reduce inflation rates over the next few years.
During the period 1973-1980, 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 well before the originally envisaged maturity date. Where a person qualifies for the mortgage subsidy of £3,000 spread over three years, 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 down red tape the income of a borrower's spouse will not be reckoned. Borrowers will be free to make repayments over and above the specified proportions of income at any time if they so wish. This will reduce the capital debt outstanding at that time and shorten the repayment period.
Under section 6 of the Bill, the Minister, with the consent of the Minister for Finance, will be empowered to issue formal general policy directives to the agency. 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 the agency will be required to meet its costs from its operations, taking one year with another.
As regards the detailed provisions of the Bill, Senators will have noted the explanatory memorandum which was circulated with the Bill. A substantial part of the measure relates to technical provisions similar to those 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 the key objects of the company.
I have already referred to section 5 in some detail. Subsections (3)-(8) are based on the corresponding provisions of section 39 of the Housing Act, 1966, relating to the existing local authority loans scheme.
I have also dealt with section 6. Sections 7-9 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 etc. 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 when the company is being set up the board of directors will 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 and 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 already referred 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 Seanad.