States Loan Interest Rate 7.5%.

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A decision made (24/06/2009) regarding: States Loan Interest Rate 7.5%.

Decision Reference: MD-H-2009-0056
Decision Summary Title :	States Loan Interest Rates/TW		Date of Decision Summary:	15 June 2009
Decision Summary Author:	Housing Control Manager		Decision Summary: Public or Exempt? (State clauses from Code of Practice booklet)	Public
Type of Report: Oral or Written?	Written		Person Giving Oral Report:
Written Report Title :	Report – States Loan Interest Rates		Date of Written Report:	12 June 2009
Written Report Author:	Policy Advisor – Population Office		Written Report : Public or Exempt? (State clauses from Code of Practice booklet)	Public
Subject: To consider whether the current maximum interest rate of 7.5% to be charged for States Loans granted from the Dwelling Houses Loan Fund is too high, or that at least this figure should be reviewed.
Decision(s): The Minister, supported by members of the Migration Advisory Group and with the concurrence of the Minister for Treasury and Resources, decided that the maximum interest rate should be maintained at the current level of 7.5%.
Reason(s) for Decision: The Minister considered the present rate reasonable in light of the nature of the scheme, in particular its long term fixed character, the subsidy elements available to avoid hardship and the apparent availability of alternative sources of finance for loan holders, as outlined in the accompanying report.
Resource Implications: None.
Action required: No action required.
Signature: Senator T J Le Main		Position: Housing Minister
Date Signed:		Date of Decision (If different from Date Signed):

States Loan Interest Rate 7.5%.

MD-H-2009-0056 POPULATION OFFICE

Report - States Loan Interest Rates

1. The Building Loans Law and Regulations sets out what rate of interest must be charged for States Loans issued under the scheme. This relates to the maximum rate, minimum rates (3% for flats, 5% for houses) and the ability to reduce individual loan rates dependant on income.

2. Prior to 1992, the Law referred to a fixed maximum rate of 10%, which was reflected in the actual contract of sale and is in effect not changeable, save for re negotiating and registering every loan contract individually.

3. In 1992, the Law was changed to reflect that from that point on, the maximum rate could be set by Order after consultation with the Minister for Treasury and Resources.

4. For a period that figure was set at 11%, reducing back to 10%, and in 2003 reduced to 7.5% where it remains today. The concept has prevailed that this interest rate should be set at a level above that obtainable in the private sector, on the basis that this would encourage borrowers on the maximum rate to refinance from the private sector, and who by definition could afford to do so. Those who were not on the maximum rate were still protected, by being able to apply for a reduced rate based on income.

5. The reduced rate facility enables those borrowers on low incomes to apply each year for assessment based on their previous year’s income, as certified by the Comptroller of Income Tax.

6. The Population Office, in conjunction with a private administrator and States Treasury, administer the present States Loan Scheme.

7. In view of the recent and current low rates of interest and official Bank Rate, there is an issue that some borrowers may feel the States should not be charging such a relatively high figure. As the Population Office, we are not currently reviewing the States Loan scheme itself, but due to hardening of the mortgage market, there have been political comments of late referring to a revival of what was at the time a very successful scheme.

8. In addition, there is a current review being carried out by Oxera with regard to mortgage facilities and availability within the Island, and following request from the Housing Minister, the Minister for Treasury and Resources has confirmed that the States Loan Scheme sits quite comfortably within that review. Nonetheless, the Minister for Treasury and Resources went on to add that “it would be unwise to expect such a general review to give a definitive answer on a States Loan Scheme….nonetheless, it should at least give us an initial view of the potential benefits and costs….and the type of scheme that might be appropriate”. The Housing Department are investigating whether States Loans could in future be utilised to enhance the Homebuy scheme, and the Population Office is also expecting some indications as to appropriate futures for the present States Loan Scheme.

9. There are currently 330 States Loans outstanding:-

239 granted before 1992 on a fixed rate of 10%, capital outstanding £3.3m
91 granted since 1992 on a variable rate currently 7.5%, capital outstanding £5.25m

10. As stated above, it is only the 91 loans that would benefit from a rate reduction. The pre 1992 loans are mainly those taken out in the sixties and seventies where although the interest rate is relatively high at 10%, because of the age and amount of the loan, the actual repayments being made are typically around £100 per month, some as low as £40 per month. In addition, the outstanding capital amounts are relatively modest.

11. It must be remembered that any borrower is entitled to apply for a reduction to their repayments if these exceed more than a quarter of their taxable income for loans granted prior to 1991, and one third of income for those granted since. Any subsidy so granted is recoverable if the loan is reimbursed, or on the sale of the property, but is written off if the loan completes its full term.

12. The majority of earlier loans granted have migrated to the private sector over the years in view of attractive re mortgaging deals. For example, in 2002 there were a total of 842 current loans, with 152 being redeemed that year.

13. There is no doubt that the current rate of 7.5% is relatively high. The current local lowest variable rates available are between 4.19% and 2.99%, with lowest fixed rates ranging from 2.99% to 5.59% (1 to 10 years).

Conclusion

14. The Minister noted that the maximum interest rate had been set at 7.5% since 2003, and that this had often been above the rate obtainable in the private sector, on the basis that it would encourage borrowers on the maximum rate to refinance from within the private sector, and who by definition could afford to do so. In addition, that the scheme is not a variable rate scheme, but more akin to a long term fixed rate scheme. Those who were not on the maximum rate were still protected by being able to apply for a reduced rate based on income.

15. Whilst the Minister acknowledged that, in view of the recent and current low rates of interest and official Bank Rate, there is a potential issue that some borrowers may feel the States should not be charging such a relatively high figure, having consulted in particular with the Minister for Treasury and Resources, the Minister remained of the view that, although this figure is higher than many rates available from private lenders, existing borrowers remain free to seek finance elsewhere, and will have likely benefited overall from the scheme, whether due to the rates on the scheme having often been lower than prevailing market rates historically, or also because many recipients will have been able to take advantage of a subsidised rate of interest if their income merited it at any time during the loan period.

The Minister also noted that average loan balances were comparatively low, meaning that small rate changes would only likely result in minor absolute changes in repayments.

12 June 2009