Local authorities have an exemption from retail credit firm status under the Markets in Financial Instruments and Miscellaneous Provision Act 2007 as local authorities provide housing finance for public purposes and at a rate more favourable than that available commercially. Therefore, the Central Bank’s macro prudential lending regulations do not apply to local authority mortgage lending.
The purpose of the fixed rate Rebuilding Ireland Home Loan is to deliver affordability and sustainability through certainty of repayments. The new mortgage arrangements regularise local authority lending with the prudent and cautious lending rules of the Central Bank. Borrowers are required to have a 10% deposit; evidence of savings; and must be capable of repaying the mortgage in accordance with a robust credit policy.
The unique aspect of this new mortgage offering is the fixed interest rate over the full lifetime of the borrowing. This means that risks normally associated with interest rate changes are eliminated. Borrowers therefore have absolute certainty of their repayments for terms of up to 25 or 30 years. Moreover, the local authority as lender has much more certainty of the borrowers’ capacity to repay the debt over the lifetime of the loan.
The long term fixed rate offering obviates the need for stress testing as the repayments are fixed for the life of the loan. Rather than a Loan to Income (LTI) limit, a maximum permissible Net Disposable Income (NDI) ratio of 35% is used which more accurately reflects the benefit of the low fixed rate available for the full life of the loan.
The credit and income assessments which underpin the loan are firmly based on a borrower’s capacity to repay the loan. Likewise, the assessments take account of borrowers’ outgoings and household commitments. Together with the certainty of the amount that a mortgage repayment will be over the entire term of the mortgage, this means that borrowers are in a much more secure position than would be the case in a variable rate position, or if assessment was singularly linked to a multiple of income. They can also take comfort from the position that they are making monthly (affordable) repayments on the capital element of their mortgage – increasing their equity stake in their home.