The Gazette 1983

JULY/AUGUST 1983

GAZETTE

Practice Notes

purchaser who is enployed by an institution with its own house mortgage scheme, but who does not immediately qualify for the scheme by reason of his short service with the institution. If he qualifies for the scheme within a few years, he will be faced with precisely the same dilemma as the borrower who wishes to sell, namely, that he is not going to be able to borrow enough under the usual terms of such institution schemes to discharge the loan to the Housing Finance Agency. Even the ordinary borrower, who wishes to turn to a building society or other similar institution for a long term loan, will almost certainly find that the amount necessary to discharge the Housing Finance Agency loan will be in excess of what he could borrow from a building society. These are points which should be clearly explained to prospective borrowers from the Agency. The Agency's own explanatory memorandum is in general very fair, but it must be said that it could perhaps improve its answer to hypothetical question 12 — "what happens if the borrower wants to sell the house?" — the answer "this problem will be treated in the same way as a conventional mortgage. The borrower must redeem the outstanding loan, there will be no special charge for this purpose" might reasonably include some reference to the particular situation created by the fact that there is no repayment of debt in nominal terms for the first 18 years of the loan, in the example supplied by the Agency. • Editorial note: it has been suggested that the warning contained in this article, which was published in the Gazette of December 1982, is of such importance as to warrant its re-publication.

Housing Finance Agency Loans — a Caution

Criticisms of delays in implementing the Housing Finance Agency scheme of house purchase loans have tended to overshadow the inherent dangers of the scheme for certain categories of borrowers. While the risks which such borrowers took were mentioned in the Society's newsletters, their primary purpose was to alert solicitors to the difficulties which clients who either could or could not get bridging finance would face because of the long gap then existing between approval and payment of the loans. Now that this gap has reputedly lessened considerably, it may be apposite to renew the warnings about the inherent risks for such borrowers. Repayments of loans under the scheme differ radically from any other house purchase mortgage scheme previously operated in Ireland. The factors which determine the amount of the annual repayments are:— 1. any increase in the consumer price index during the previous year (interest is not to exceed the rate of inflation plus 3.25%) and 2. the borrower's gross income in the previous year (payments not to exceed 18% of such income). The aim of the scheme is a desirable one, namely, to reduce the burden of mortgage repayments in the early years of the loan, but this inevitably means the capital mortgage debt will rise. The Agency has published an example showing an original debt of £22,500 increasing to £58,000 in the 10th year and £101,358 in the 15th year. Using projections of average annual inflation of 15% and average annual salary increases of 16% over the period, the Agency shows that the ratio of the borrower's debt to his current income will decline from the figure of 2.90 to nil over the 25 year period. Leaving aside doubts about the inevitability of salary increases bettering inflation (and economists have usually been rather better at pathology than prophecy) is it necessarily true that there will be a commensurate increase in house prices, particularly in the short term? If there is not, then it may prove very difficult for a borrower to sell his house. Taking the agency's calculations and assuming a purchase price of £26,000 and a loan of £22,500, the borrower would at the end of the third year have to repay £31,647 to the agency and, therefore, to have the same percentage of the sale price in his pocket as he had of the initial purchase price would require to achieve a selling price of £35,147, or an increase over the three-year period of 40% over the initial price. Present trends in house prices would not encourage the belief that there would be such an increase. What is certain, however, is that a borrower will not be able to refinance the mortgage from a normal source of mortgage finance. The most obvious case would be a 154

Conveyancing Note

V.A.T. on lending institutions solicitors fees: Change of Practice.

The Principal Inspector of the Dublin V.A.T. District has made a ruling that Lending Institutions Solicitors are not entitled to issue V.A.T. Invoices to Borrowers or their Solicitors in respect of fees for the taking up of documents or the preparation and completion of releases of Mortgages. The Revenue's view is that the Lending Institutions' solicitors' contract is with his client and he is therefore entitled only to issue Invoices to that client. Accordingly, the V.A.T. Invoice must b : issued by the Lending Institutions Solicitor to the Lending Institution and the amount of the V.A.T. can only be included in the total fee charged to the Borrower or Borrowers Solicitor and should not be set out separately. This reverses the recommendation made by the Conveyancing Committee in the March, 1983 Gazette. •