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News : Property Last Updated: Jul 18, 2014 - 1:18 AM


Irish Interest-Only Mortgages: Central Bank didn't collect data; Now warnings of danger
By Michael Hennigan, Finfacts founder and editor
Jul 16, 2014 - 3:39 PM

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Irish Interest-Only Mortgages: In 2006 we asked the Central Bank for data on interest-only (IO) mortgages but no data was requested from banks. Today the bank published an economic letter in which it warns of the danger of mainly BTL (buy-to-let) mortgages from the period 2005-2008 seeing an end to the interest-only period in coming years. 

The research shows that the IO period expires for 43% of these loans in the next 24 months requiring both principal and interest (P&I) to be paid.

Jane Kelly, Gerard Kennedy & Tara McIndoe-Calder, authors of the letter published today say the concern is that when they move to P&I, some borrowers may experience difficulty meeting the higher repayment schedule. Evidence suggests that the switch from IO to P&I has tended to trigger arrears in the past for these borrowers, with the over 90 days arrears rates much higher than for other BTL borrowers.

The economists say that 44% of buy-to-let borrowers currently on interest-only mortgages will be past retirement age by the time they have to begin principal repayments, according to the authors, which will make the higher cost burden more difficult.

However the Central Bank notes that there is time to address this for the most part, as there is on average 14 years before a switch takes place for these borrowers.

In the sample, 15% of mortgages by value are subject to IO repayments: 8.2% of the book are original IO, while the remainder are IO loans which involve some element of modification.

The authors say that  in general, the arrears rates are higher amongst IO loans than their P&I counterparts, particularly for loans over 360 days arrears. "This failure of IO borrowers to meet their repayments is concerning given the reduced repayment burden they face whilst on IO terms and the prevalence of low cost tracker mortgages among these borrowers."

We wrote in 2006 [In recent years, more than 75% of Bank of Ireland investment customers have availed of the bank's ten-year interest-only mortgage, according to Bank of Ireland Mortgages Manager Olive Moran.

"It's very attractive as it enables investors to defer capital repayments for the first ten years," Moran told the Sunday Business Post. "They can then spread the capital repayments over the remaining period of up to 15 years. Alternatively, if they have access to a lump sum from a personal pension policy, they can use these funds to repay the outstanding capital."]

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