Financial Regulator to query developer interest-free loans (The Irish Times)

04 November 2011

The Financial Regulator is to question developers Bernard McNamara and Ray Grehan on their plans to offer interest-free loans to encourage property purchasers who cannot raise large deposits.

Companies owned by Mr McNamara and Mr Grehan, two of the country's largest property developers, revealed plans this week to assist buyers who cannot afford to raise larger deposits to purchase properties by offering them interest-free loans.

Mr McNamara's firm Radora is offering a loan of up to 30 per cent of the selling price to attract buyers for 70 of the 330 apartments at its ElmPark development in Dublin. The loan would not have to be repaid for five years. Glenkerrin Homes, Mr Grehan's firm, is offering a deferred payment of 15 per cent on its developments through an interest-free loan to be repaid after seven years.

The deals are being offered as the global banking crisis has forced lenders to demand up to 20 per cent of the price of homes in cash, forcing buyers to raise more money.

This type of loan arrangement, known as the "second mortgage", is commonplace in many other countries, but this is the first time such a scheme has been used by property developers in Ireland.

A spokesman for the regulator said: "At first glance it would appear that this type of activity requires authorisation from the Financial Regulator, although we would need further clarity as to what precisely is being proposed. Regulated entities must comply with the provisions of the consumer protection code, including provisions covering suitability of products for consumers."

The spokesman said that interest-free loans with a deferred repayment would "appear" to fall into the same category as retail credit and home reversion firms, which buy a portion of a property in return for a lump sum that is repaid later in a single payment. Such firms came under the regulator's supervision this year.

Glenkerrin's solicitor Joseph Stanley said that the initiative did not fall under the remit of the regulator because there was no interest on the loan and it would be repaid with a single payment.

Mr Stanley said: "We don't believe that it is covered by the regulations. It is not shared ownership. The 15 per cent is treated as a loan back to the purchaser."

Mr McNamara could not be reached for comment last night.

Glenkerrin is still in negotiations with several banks on how the scheme would work - for example, what happens if the loan fell into arrears.The firm is also considering whether an "inter-lender agreement" is required between the company and the lender providing the mortgage. This would confirm that the lender would be repaid first if it is sold or if repayments are missed and the property is repossessed.