Interest-free loans to youths: What impact?

Opinion

There’s no free lunch. Any money given by the government, whether directly or indirectly, is paid out of tax revenue. So, ultimately, the burden of the measure will fall on taxpayers

By Dr Vinaye Ancharaz

The PM’s proposal to offer interest-free home loans to youths aged 18-35, if re-elected, has provoked much debate across the populace. The proposal follows the launch of free Internet for the same group of voters and the announcement that the PRB report to be published in December 2025 will come into effect retroactively as from January 2025. It is clear that the interest-free home loan proposal is part of a bigger package of electoral bribes meant to woo voters.

But why this measure, and why now?

Is it really a perk, or just some sort of compensation for the government’s failed policies? I tend to believe it’s the latter. Prices since 2020 have increased so much that a decent house is beyond the reach of most youths aspiring to settle down into family life. And don’t blame it on the pandemic! Much of it is home-made. Land prices have skyrocketed due to IRS projects and not-so-smart cities. Construction costs have flared up largely because of the persistent depreciation of the rupee, and repeated hikes in the minimum wage. The proposal to exempt young mortgagors from interest payment is thus a palliative measure that bypasses the real problem. It’s like someone set your house on fire and then helps you put it out. You thank the person for helping, but you conveniently ignore the fact that he was the arsonist.

Who will benefit from the proposal?

Considering that the average price of the recently inaugurated social housing units comes to Rs3.7 million, excluding the price of land, a modest dwelling will not cost less than Rs5 million. How many of our youths can afford to take out a loan of this amount to acquire a property? Based on information I have gathered from different borrowers, I estimate that the monthly repayment for a Rs5 million home loan over 25 years will be in the vicinity of Rs30,000. Suppose Rs10,000 of this amount is the interest charge, which will be paid by the government. That still leaves the borrower with a monthly liability of Rs20,000. If we assume that the loan repayment does not account for more than 40% of the borrower’s salary, as per current industry practice, the salary must be at least Rs50,000 for someone to be eligible for a Rs5 million home loan.

At what age will the average youth reach this salary to qualify for an interest-free loan? The median salary in 2023 was Rs18,000. With the revenu minimum guaranti at Rs20,000 and the recent salary adjustments, let’s say that the median salary has today increased to Rs30,000. This means that half of the working population earns less than Rs30,000, with most of our youths falling into this category. As a result, the majority of individuals aged 18-35 are unlikely to benefit from the proposal.

Moreover, with shifts in culture, rising expectations, and demonstration effects, the typical young worker often prioritizes owning a car over acquiring a house. Additionally, the plethora of financing facilities available has made achieving this goal all too easy. A few years later, the youth would borrow to finance his wedding. By the age of 30 or so, many young professionals are already burdened with debt to the extent that they may become ineligible for additional loans. As a result, only a few — primarily those who are already well-off — will actually benefit from the proposal. Thus, there is a risk that the proposal creates two categories of youths. The handful who benefits from it, and the many who will foot the bill. 

Institutional risks

The modalities of the proposed measure are yet to be defined. At this stage, it is unclear whether commercial banks, or the Mauritius Housing Corporation (MHC), or some other government organization will be implementing the scheme. The risk with government intervention is that it opens the doors to corruption and favouritism. Similar to social housing, it’s not necessarily the most deserving who will get the opportunity to become a homeowner on the back of interest-free mortgages.

Furthermore, the proposal may create both an adverse selection and a moral hazard problem. Adverse selection occurs when ineligible borrowers are given loans based on their political affinity rather than their financial capacity. Moral hazard is the thinking that the government will bail out bad mortgage payers. Together, these problems could lead to high default rates and bad debt, with adverse consequences for financial stability and governance.

Finally, there’s no free lunch. Any money given by the government, whether directly or indirectly, is paid out of tax revenue. So, ultimately, the burden of the measure will fall on taxpayers. Will taxes be raised to finance this and other populist measures? Time will tell.

Beggaring the nation?

The current predicament reminds us of Michael Hopf’s famous quote: “Hard times create strong men. Strong men create good times. Good times create weak men. Weak men create hard times.” Is the MSM government creating ‘un peuple assisté’ by constantly doling out freebies to the people? If so, will they have the grit to steer the economic course of the country into the future, or will they, as Hopf warns, become weak pawns who lead the country to disaster?

Mauritius Times ePaper Friday 13 September 2024