# A proposal for interest-only loans for long term arrears cases



## Brendan Burgess (8 Dec 2020)

John Moran, a former Secretary General, of the Department of Finance, has put forward a proposal whereby patient capital funds would buy  mortgages in long-term arrears from the banks and allow the borrowers to pay interest only.

I attach the paper which sets out the scheme,  but this is my understanding of how it would work from the borrower's point of view.

1) The borrower owes €200k on a house worth €200k.
2) He can pay interest only but cannot repay the capital
3) The fund would buy the mortgage from the bank
4) The borrower would pay 3% interest or €6,000 a year

The loan would be repaid when the borrower sells the house or dies.  (Not sure of this.)

The lender would be very happy with earning a 3% return on their loan.

To implement this, the government would need to do the following

1) Underwrite the payment of interest
2) Make repossession much quicker


----------



## Brendan Burgess (8 Dec 2020)

This is a lot better than mortgage to rent.

It is much cheaper for the government to pay interest than to pay rent.

This loan would cost the taxpayer €6,000 a year.

If the house is bought under the mortgage to rent scheme, the government would probably pay about €18,000 a year in rent and maintenance and admin. 

It is much better for the borrower as well, as they retain ownership of their home.


----------



## Leo (9 Dec 2020)

Brendan Burgess said:


> This is a lot better than mortgage to rent.



Much better option for older homes that might struggle or require very extensive works to meet the ever increasing standards for rental accommodation.


----------



## NoRegretsCoyote (9 Dec 2020)

One issue is that a lot of these people have an income too low to afford the mortgage but actually have a lot of positive equity. You can see this in the Central Bank arrears studies. You see people with <50% LTVs who haven't paid the mortgage in 5 years.

This has tended to rule them out of schemes in the past.


----------



## Brendan Burgess (9 Dec 2020)

NoRegretsCoyote said:


> You see people with <50% LTVs who haven't paid the mortgage in 5 years.



Hi Coyote

While your point is valid generally, I don't think that the Central Bank publishes information on how many people have not paid the mortgage in 5 years? 

They do publish "over 5 years arrears" which is a different thing. 

Brendan


----------



## Brendan Burgess (9 Dec 2020)

Leo said:


> Much better option for older homes that might struggle or require very extensive works



Very good point which I had not thought of. 

Under Mortgage to Rent the fund buys the house and refurbishes it. 

Brendan


----------



## Brendan Burgess (9 Dec 2020)

NoRegretsCoyote said:


> You see people with <50% LTVs



If someone has an LTV of <50% and they can't pay the interest but would otherwise qualify for social housing, then the state should just pay the interest as a second mortgage on the property.  

Brendan


----------



## Leo (9 Dec 2020)

Brendan Burgess said:


> Under Mortgage to Rent the fund buys the house and refurbishes it.



Up to a certain limit I believe, €10k per the attachment in this post.


----------



## NoRegretsCoyote (9 Dec 2020)

Brendan Burgess said:


> While your point is valid generally, I don't think that the Central Bank publishes information on how many people have not paid the mortgage in 5 years?



Indeed, I was simplifying for a non-technical audience  

You can do survival analysis of the aggregate statistics that show there is a material cohort who pay absolutely zero.


----------



## RedOnion (9 Dec 2020)

NoRegretsCoyote said:


> Indeed, I was simplifying for a non-technical audience
> 
> You can do survival analysis of the aggregate statistics that show there is a material cohort who pay absolutely zero.


Ah yes, but you've inferred that those people can't afford to pay anything. You need to split it out between those that can't pay and those that won't pay.


----------



## NoRegretsCoyote (9 Dec 2020)

RedOnion said:


> Ah yes, but you've inferred that those people can't afford to pay anything.


Some can, some won't. You will never get a clear answer here because people who won't pay are most unlikely of all to engage with the bank. Probably not very likely to engage with this type of scheme either.

More precisely put, previous schemes of this nature have seen low take-up because many people whose incomes are low enough to meet the criteria still have positive equity.


----------

