Radora, a company owned by Bernard McNamara, is offering loans of up to 30% of the selling price of homes to attract buyers for apartments at a development in Dublin. The loans, at 0% interest, do not have to be repaid for five years.
Glenkerrin Homes, the company of the second developer, Ray Grehan, offers an interest-free loan for up to seven years on apartments and other properties, also in the Dublin area.
This is the first time such piggyback mortgages have been used by developers in the Republic.
The office of the Irish financial regulator is currently looking into whether such loans fall within its remit as well as the provisions of the country’s consumer protection code, which includes the suitability of products for consumers.
The loan initiative, which has the support of the Irish Construction Industry Federation, may be adopted by other developers in a bid to break the prevailing market paralysis.
According to one estate agent, as a result of the recent building boom, Dublin now has a three-year oversupply of new houses and apartments, with potential buyers in the city hamstrung by the cautious lending policies being ad-opted by banks as a consequence of the credit crunch.
Grehan said: “Sales have come to a halt because banks will only lend 80% of the purchase price, so would-be buyers have to come up with 20% deposits.
“On a €300,000 property, that’s a €60,000 deposit and consumers simply don’t have that sort of money in savings. We are trying to bridge that gap with the interest-free loans scheme.”
Under the deal, potential buyers would have to find just a 5% de-posit, with the 15% developer loan – to be repaid after seven years – making up the difference.
But critics have pointed out that at the end of the seven-year period, a substantial lump sum will have to be repaid. They question whether buyers will be able to save the amounts required.
And if owners are forced to remortgage their homes to make the repayments, will loans be more easily available seven years from now and what will interest rates be at that time?
Critics also ask – if the repayments cannot be made, will that result in a glut of properties coming onto the market, depressing prices further?
According to their critics, the schemes are a recognition by developers that, even with reductions, their properties are overpriced, and they advise would-be buyers to press for further price cuts rather than accepting incentives.
But given an opportunity to get an immediate foot on the property ladder, many may not be willing to heed such advice.