# Article: What is a sustainable mortgage



## Brendan Burgess (7 Aug 2014)

Here is an article I had in the Sunday Business Post on 20 July 
*At this stage, exactly what is a sustainable mortgage?*




           The  very first recommendation in the Oireachtas Finance Committee’s recent  report on mortgage arrears called on the Central Bank to issue a  definition of a sustainable mortgage from the borrower’s point of view.

The  Central Bank does have a definition of a “sustainable solution”, but  this is a prudential definition from the lender’s point of view. Up  until recently, this definition said that for a mortgage to be  sustainable, it must be paid off in full by age 70. There were many  cases of 50-year-old couples with €60,000 remaining on their mortgage  who could well afford the interest of €250 a month, but who could not  make any capital repayments. The Central Bank was classifying these  mortgages as unsustainable, which caused huge stress and worry for these  borrowers.

After a suggestion  from the chairman of the Oireachtas Finance Committee, Ciarán Lynch, the  Central Bank has amended its guidelines so that lenders can, in  exceptional circumstances, allow a borrower to continue to pay their  mortgage into retirement.

But the  Central Bank has still not issued any guidelines as to what a  sustainable mortgage is from the borrower’s perspective. Where a  mortgage is genuinely unsustainable, it is in the interests of the  lender and the borrower to face up to this as soon as possible so that  they address it. Objective guidelines from the Central Bank would help  borrowers to face reality.

Where a  lender is classifying a perfectly sustainable mortgage as  unsustainable, clear guidelines from the Central Bank would strengthen  the borrower’s hand in negotiations with the lender. If the case went to  court, the Central Bank guidelines would be very useful in guiding the  judge whether or not to grant an order for repossession.

So how might the Central Bank define a sustainable mortgage?

Most  people simply assume that a borrower must be able to make their full  capital and interest repayments over the term of their mortgage for it  to be sustainable. If they can’t make their full capital and interest  payments, they assume that the mortgage is not sustainable. I want to  challenge this definition which has arisen from custom and practice and  which has no theoretical basis.

I  would propose an alternative definition which surprises most people  when they hear it first - while a borrower is able to pay the interest  on their mortgage, that mortgage is sustainable for the borrower. The  cost of ownership of a home is the interest paid on the loan. If they  can afford the cost of ownership, their mortgage should be considered  sustainable. While they are paying the interest in full, the balance on  their mortgage account is not increasing. If they are unable to pay the  interest on their mortgage, the balance owing on the mortgage is  increasing, and so their mortgage is unsustainable.

Compare  the situation of a mortgage holder with someone who chooses to rent  their home. The cost of accommodation for a renter is the rent. While  they can afford the rent, their accommodation is sustainable. When they  can’t afford the rent, their accommodation is unsustainable. We don’t  require a person who rents their home to build up a separate savings  fund so that they can buy a home outright on retirement.

Likewise,  we should not insist that a borrower own their home mortgage-free on  retirement to be sustainable. According to our proposed definition, if a  retired borrower is able to pay the interest, then the mortgage will be  sustainable. If they can’t afford to pay the interest because their  income has been reduced, the mortgage will be unsustainable. But it’s  better to have a voluntary sale at 65 than at 50.

There  can be many favourable developments between the ages of 50 and 65.  Inflation may increase the level of pensions. The borrower’s housing  needs may change and trading down to a smaller property may suit the  borrower. They may get an inheritance or lump-sum on retirement with  which they can pay off the mortgage. But it makes no sense to classify a  mortgage as unsustainable at 50, because of something which is expected  to happen 15 years later.

Of  course, for a mortgage to be sustainable, it must be sustainable for the  lender as well. Where a borrower is able to pay the standard variable  rate of interest on a mortgage, it is sustainable and profitable for the  lender. Swiss banks recognise this. They lend up to 65 per cent of the  value of the home to new borrowers on an indefinite, interest-only  basis. The borrower simply pays the interest. They do not have to repay  any capital until they sell their home.

While  paying only the interest on a cheap tracker mortgage may well be  sustainable for the borrower, it is not sustainable for the lender.

In  effect, the lender would be extending a loss making loan indefinitely.  Rather than classifying the loan as unsustainable and forcing a  voluntary sale, some other solution needs to be reached which balances  the needs of both sides. For example, the interest rate could be  increased by 1 per cent and switched to interest only.

It  is extraordinary that, after six years of the mortgage crisis, we have  had so little discussion of what constitutes a sustainable mortgage. The  Central Bank should kick off this discussion immediately.

_Brendan  Burgess is the founder of the discussion forum askabout money.com, and  was a member of the government’s expert group on mortgage arrears_


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## Steven Barrett (7 Aug 2014)

What about the kids inheritance?  

It's the Irish mindset that the kids must be left with something, even if it means struggling through years of paying off debt so the kids can get something in their 60's/70's.


Retiring with debt is a bad idea though. For most people, their income reduces significantly at retirement but they have all the time in the world to do things so their cost of living increases. Debt repayments now take up a much larger percentage of disposable income. Better off paying off debt before your income shrinks. 


Steven
www.bluewaterfp.ie


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## Bronte (7 Aug 2014)

Brendan Burgess said:


> If the case went to court, the Central Bank guidelines would be very useful in guiding the judge whether or not to grant an order for repossession.


 
I like the article but don't get the above bit.  Guidelines are not laws.  The contract between the borrower and the lender is what is important.  So I don't see why a judge would look at CB guidelines in relation to granting orders for repossession etc.


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## Brendan Burgess (8 Aug 2014)

SBarrett said:


> Retiring with debt is a bad idea though. For most people, their income reduces significantly at retirement but they have all the time in the world to do things so their cost of living increases. Debt repayments now take up a much larger percentage of disposable income. Better off paying off debt before your income shrinks.



The ideal outcome is that someone reaches retirement with a generous defined benefit pension, mortgage free, and with plenty of savings. 

However, most people will not achieve this. 

This article is about people who are struggling with their mortgages now and trying to come up with solutions for them.  They should not lose their home in their 40s just because they will not be debt-free in their 60s. 

If they lose their home now, when they retire they will be in a far worse position as they will have to pay rent anyway. 

Ideally, someone should be mortgage free on retirement. But it is far better to have an interest only mortgage of €100,000 costing €5,000 a year, than to be paying rent of €12,000 a year.


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## Brendan Burgess (8 Aug 2014)

Bronte said:


> I like the article but don't get the above bit.  Guidelines are not laws.  The contract between the borrower and the lender is what is important.  So I don't see why a judge would look at CB guidelines in relation to granting orders for repossession etc.



Hi Bronte

It's not that simple. If you are in any arrears, you are in breach of contract.  The judge will not automatically order possession. 

The  judge has a lot of discretion. The judge looks at the amount of arrears and this is usually the measure they use to decide whether to give a repossession order or not. They give the borrower plenty of time to clear the arrears. 

If we were able to get away from arrears as the only measure of distress, then, people would be less vulnerable. 

If the CB defined a sustainable mortgage as the ability to service the SVR interest, then I would feel that the judge would be strongly persuaded by that.


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