The Central Bank told the Department of Finance a scheme for mortgage interest relief would almost exclusively benefit homeowners aged over 40 who were the least likely to have challenges paying back their home loan.
In an analysis of Government plans to help mortgage holders in last year’s budget, the Central Bank said the scheme was not focused on those who were suffering most from the “shock” of rising interest rates.
It said that of those to benefit from the scheme, only 8% were paying extortionate interest rates of greater than 6%, the group the Central Bank believed needed help the most from Government.
They said plans for the scheme, as presented to them, would “almost entirely” benefit holders of tracker mortgages who for many years had substantially lower interest bills than other householders.
It said those eligible for the scheme also had smaller loan balances and that it appeared to largely exclude younger borrowers who were far more likely to have bigger loans to repay.
An analysis of the scheme said: “Tracker mortgage holders, who represent the majority of eligible borrowers, are much less likely than [variable rate] mortgage holders to be in the lower-income cohorts of the mortgage market”.
“And they are less likely to have entered this shock with large debt service burdens relative to income,” the analysis added.
It said giving mortgage holders tax relief they did not genuinely need was a “deadweight” and risked increasing house prices without any increase in home ownership rates.
The analysis from early October last year said the mortgage interest relief scheme would cost around €120m per annum but that there was a risk this could rise in future years.
It also added that removal of the relief could prove very tricky for the department as “households may believe that in the future government will step in to support them in adverse circumstances”.
“The Central Bank would have deep reservations were the scope of the scheme to widen to include new lending, as it would provide another pro-cyclical demand-side stimulus in a housing market that is characterised by extremely weak supply,” the noted added.
It said a combination of mortgage interest relief and other government schemes including Help to Buy could interact to create “additional overheating risks” in the housing market.
“This could represent a particularly poor use of taxpayer funds without solving the underlying structural issues in the housing market,” the analysis said.
The Central Bank also warned there was the potential for a mortgage interest relief scheme to encourage lenders to increase their rates.
“Under such a scenario, the relief would act to support lender profitability without necessarily helping borrowers as intended,” it added.
The Central Bank was asked as well to examine a possible scheme that would apply only to those who had mortgages with interest rates of greater than 6%.
They said while the number of people to benefit would be relatively low, it was possible this would grow if interest rates continued to rise.
In an analysis, the Central Bank said it was feasible such relief could discourage mortgage holders from switching to rates of say 5.5% or 5.75% in case they would lose their government support.
The analysis said: “There is no targeting of the scheme to those with the greatest affordability challenges. There is little or no relationship between income and mortgage interest rates.”
In conclusion, the Central Bank said they believed the fairest way to help struggling householders was through the social welfare system with means-testing and direct targeting of those worst affected.