The Government has been forced to make significant changes to one of its key budget proposals on foot of concerns raised by the Central Bank and pressure from Fianna Fáil.

The Central Bank had warned the income tax rebate for first-time buyers could encourage people to take on too much debt.

Minister for Finance Michael Noonan has sought Cabinet approval to make further changes to the threshold up to which an income-tax rebate worth up to €20,000 can be claimed under the help-to-buy scheme, due to political pressure from Fianna Fáil.

Mr Noonan will address the Central Bank’s concerns when he publishes the Finance Bill, which gives legislative effect to budgetary tax changes, this afternoon.

The help-to-buy plans propose a rebate of income tax paid over the previous four years. The rebate will be worth up to 5 per cent of the price of a home to a value of €400,000, allowing for a maximum rebate of €20,000. The initial plans said first-time buyers of homes up to €600,000 would also be entitled to the rebate, although it would be capped at €20,000. It will only apply to new homes and self-builds.

Excessive debt

The budget announcement stipulated that applicants to the scheme must take out a mortgage of “at least 80 per cent of the purchase price” of the home to qualify.

The Central Bank raised concerns this could encourage buyers to take on excessive debt. The bank pointed out that the average mortgage for first-time buyers is now 78.7 per cent of the value of a home.

The Finance Bill will mean those availing of the scheme must now take out a mortgage of at least 70 per cent.

The scheme was proposed by Minister for Housing Simon Coveney and Mr Noonan to help first-time buyers to overcome the difficulties in accumulating a mortgage due to Central Bank rules.

Mr Coveney – who last week insisted Fine Gael was standing over the scheme – also said the measure would boost the supply of new homes.

The rules say first-time buyers must accumulate a 10 per cent deposit on the first €220,000 of the value of a home, and 20 per cent of any value thereafter.

While Mr Noonan said he had kept the Central Bank abreast of his plans in advance of the budget, a Government source said: “The idea of a scheme and the details of a scheme are different.”

Fianna Fáil has objected to the €600,000 threshold, with its housing spokesman Barry Cowen dubbing the scheme a "mansion grant". He favours a €400,000 cap.

While the €600,000 cap will remain in the Finance Bill, Mr Noonan earlier this week sought Cabinet approval to change it if needed. Any changes are expected to be made when the Bill is at committee stage.

Compromise cap

Some Government sources suggested a compromise cap of €500,000, while others said a final figure had yet to be decided upon. Sources also insisted it would not be extended to second-hand homes, as Fianna Fáil had requested. One Minister noted Mr Noonan had said he was open to changing the caps. “But I’m not sure we should give in to Fianna Fáil.”

The Finance Bill will also contain measures to clamp down on tax loopholes by so-called vulture funds holding Irish property.