The Irish Central Bank has expressed concerns to the Department of Finance about a mortgage interest relief scheme, stating that it would predominantly aid homeowners above the age of 40 who are least likely to struggle with home loan repayments. The bank scrutinised the governmental plans to assist mortgage holders in last year’s budget, indicating that the scheme fell short in addressing those most pained by soaring interest rates.
The bank stated that only a mere 8% of beneficiaries, who were imposed with excessive rates of over 6%, truly required governmental assistance. The scheme, as outlined, was primed to almost completely favour tracker mortgage holders who enjoyed significantly reduced interest expenses for an extended period.
In addition, those who qualified for the scheme mostly had lower loan balances. Notably, the scheme largely seemed to exclude younger borrowers who were more likely to bear larger repayment commitments. The bank’s review of the scheme noted: “The majority of eligible borrowers are tracker mortgage holders, who are less likely to belong to lower-income groups and less likely to have entered this shock bearing large debt repaying burdens.”
The Central Bank criticised the idea of granting tax relief to mortgage holders who did not actually require it, labelling it a ‘deadweight’. It further warned such a move could potentially inflate property prices without an uptick in home ownership rates.
Last year’s October analysis projected that the mortgage interest relief scheme would incur an annual cost of approximately €120 million, with the possibility of an upward trend in subsequent years. The analysis further hinted difficulty for the department in abolishing the relief scheme because of potential expectations of future governmental support from households during difficult times.
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The bank would hold strong reservations if the scheme’s scope were to broaden to incorporate new lending. Such an integration would present yet another pro-cyclical demand-side stimulus in an already strained housing market.
It further highlighted that the interaction of the mortgage interest relief and other governmental schemes such as Help to Buy could possibly induce supplementary risks of overheating in the property market. The analysis concluded that this could lead to an exceptionally imprudent use of taxpayer funds without amending the fundamental structural problems in the housing market.
The central bank recently highlighted the risk of a mortgage interest relief scheme inadvertently prompting lenders to boost their rates. It noted that in such a situation, the supposed relief could actually bolster lender profitability, without necessarily offering the intended aid to borrowers.
In response to an inquiry regarding a potential scheme limited to those with mortgage interest rates over 6 per cent, the bank stated that while the beneficiaries may initially be somewhat minimal, their numbers could increase if interest rates kept climbing.
The financial regulator noted the possibility of this relief discouraging mortgage holders from switching to lower rates, for example, 5.5 or 5.75 per cent, for fear of losing government support.
“There is no focus of the scheme on those facing the biggest affordability struggles. The connection between income and mortgage interest rates is minimal or non-existent”, stated the regulation authority.
The central bank suggested that the social welfare system with means-testing and pinpointing those severely impacted, could be a fairer approach to assist households under financial duress.
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