New scheme can help you buy your first home

Liam Croke

Reporter:

Liam Croke

New scheme can help you buy your first home

Ministers O'Donoghue and Noonan announced a tax rebate scheme for first time buyers

I was giving financial advice to a young man (Gerard) at the beginning of the month, who was 30 years’ old.

He was asking me to analyse his monthly outgoings and show him how to better manage his finances each month, so he could free up more cash that could be used towards savings. And the reason he wanted to save more, was because he wanted to buy a property and he needed to save for his deposit.

He advised that the location he wanted to purchase in, the asking prices were c. €300,000 and under the current Central Bank lending guidelines, the minimum amount he would have to personally contribute was €38,000.

He had saved €8,000 to date and in order for him to save the balance, he would need to be saving at a particular rate if he wanted to purchase within a specific time period.

Based on his current salary, and what his fixed outgoings were, at a stretch he could possibly save an additional €300 per month at best, so it would take him about 8 years before he would have enough for his deposit.

And this was the reality for most people, but that all changed when in last weeks’ budget when it was announced that first time buyers are going to be able to claim a tax rebate equal to 5% of the property they are buying from January 1, 2017, which can be used towards the deposit they need to have.

And it was such good news for the likes of Gerard who had resigned themselves to maybe never being able to buy a property in their own right or at least not for a very long time. But what this initiative has done is help first time buyers’ fast track the home buying process. Gerard will be able to claim €15,000 (€300,000 x 5%) and when added to his existing savings will allow him buy a property in half the time it would have ordinarily taken him.

The 5% first time buyers are allowed to receive will come in the form of an income tax rebate. And the total rebate will be limited to the total income tax paid (not USC or PRSI) by the individual over the four tax years prior to the year they are buying the property, and is capped at €20,000. Where a property is valued between €400,000 and €600,000 the maximum relief of €20,000 will still apply and no relief will apply to any first time buyer, and I suspect very few will fall into this category, if the property or house they build is greater than €600,000.

I believe this is a very welcome initiative for first time buyers struggling to get their deposit together, which is particularly difficult if one person is saving to buy a property in their own name. At least if you were buying with someone, you have two incomes to save but with just one, it is much more difficult. However, the question mark hanging over this scheme is that it could drive property prices up, because developers could increase the purchase price by the relief first time buyers are receiving. And there has been evidence that this is exactly what happened soon after it was announced on budget day. If it happened to Gerard and his property went from €300,000 to €315,000, he would need an additional €3,000 in his deposit (€38,000 now becomes €41,000) which I don’t think would put him off buying, and developers will know this which is why prices of new properties, I suspect will cost more post October 11, than if nothing had been done.

There are a number of conditions attaching to this scheme, and the one I dislike the most is that it is limited to buying a new house, apartment or self-build property – second hand properties are excluded from the scheme, and the rationale behind this is to help get the construction sector to build new homes, because current new builds in the large urban areas in Ireland is well below the demand for additional homes, which is understandable.

In order to qualify, you must take out a mortgage of at least 80% of the purchase price, and in the case of a property you are building, at least 80% of the valuation approved by your mortgage provider.

The help to buy scheme is not open for business until January 1, 2017, and Revenue will not accept any requests until then. However, anyone who has signed contracts to purchase their first new home on or after the 19 th July 2016 will be eligible to make that claim in January. And for those who were building a property, as long as their first stage payment was drawn down on or after the 19 th July 2016, they will also be eligible.

The help to buy scheme is due to run until December 31 st , 2019. The process to make an application is made on-line, so you must first register with Revenue’s on-line service which is myAccount for PAYE workers or ROS for the self-employed, and then complete a form 12 (document used to file returns for PAYE taxpayers) for each of the four years in which you want the rebate deducted from your income tax. When you begin this process with Revenue, you must confirm a contract is signed and a copy of it must be uploaded to their website. You must advise what the purchase price of the property is, the estimated date of completion, your bank details, your loan approval offer from your mortgage lender, details of the developer you are buying from or contractor who is building the property and once all details are verified and deemed to be in order, the rebate will be paid. And according to sources within the Department of Finance and Revenue, all applications will be processed as quickly as possible because they don’t want to hinder the buying and completion process for the home buyer. It is important to know that clawbacks will apply in certain circumstances i.e. you must reside in it for a period of five years from the date the property is habitable so you can’t rent the property out before then, and if they found out that you were in fact not a first time buyer because you previously bought or had an interest in another property.

Liam Croke is MD of Harmonics Financial Ltd,

based in Plassey. He can be contacted at liam@harmonics.ie or www.harmonics.ie