# Central Bank report on interest only mortgages



## Brendan Burgess (16 Jul 2014)

*New research on interest-only mortgages in Ireland*
 The Central Bank of Ireland today publishes a new Economic Letter on ‘Interest-only mortgages in Ireland’ (Economic Letter Vol. 2014 no. 5).
 The research analyses the loan  characteristics, including loan performance, of mortgages originated on  interest-only terms in Ireland. 
 The main findings of the research are:


While interest-only arrangements have  been widely used as a means of temporary forbearance to deal with the  current mortgage arrears crisis, mortgages were also originated on  interest-only terms during the height of the boom.
Between 2005 and 2008, interest-only  mortgages were mainly issued to buy-to-let investors on tracker  mortgages and at high loan-to-value ratios.
Interest-only  mortgages were more likely to be issued to buy-to-let borrowers in  Dublin and for the purchase of apartments than standard mortgages. The  arrears rates on these mortgages are higher than standard mortgages.
A significant number of interest-only  mortgages are due to revert to principal-and-interest repayments in the  next 2 years. The resulting higher repayments for these borrowers could  lead to an increase in mortgage arrears.
44 per cent of the buy-to-let interest  only borrowers will be beyond retirement age when their loans are due to  start principal-and-interest repayments.  However there are 14 years on  average until these borrowers retire, allowing them substantial time to establish strategies to cope with the  additional repayments.


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## dereko1969 (16 Jul 2014)

Banks that are state owned or with significant state ownership should push through on repossessing these buy-to-lets. 

The research is showing that some of these owners are taking the proverbials especially given the way rents have increased (in Dublin certainly) whilst these loans are mainly on trackers.

If the Banks won't even start repossessing buy-to-lets then they'll never address the number of unsustainable mortages on PPRs.


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## Branz (16 Jul 2014)

The data is for end June 2013, which seems a pity, given that this stuff could be almost real time, especially as its the state owned banks data
The banks relish the rising property and rent values, as well as the prpect of income tax cuts, while on the other side, 
NAMA has plans to intervene in the Dublin market:
http://www.irishtimes.com/business/...ans-to-intervene-in-property-market-1.1868084


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## Bronte (17 Jul 2014)

I wonder how they did that research, a cursory reading of AAM would have given one the same conclusions.


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## Gerry Canning (17 Jul 2014)

Arn,t the Central Bank just great!.
They spend resources to tell us what we know as per Bronte.
..............
 {interest only as temporary forebearance} 
Not so, why did they not just admit  that forebearance was a stop gap solution to hold things until they got a handle on how big a mess mortgages were in.
It was not (forebearance) it was push the can down the road.
.........
Dereko1969,s comments about start repo on Btl . He could well be correct but if property in Dublin increases another 10% ths year, we Mr Taxpayer will have to fund less of the losses, maybe since market is rising , lets take it (cool).

Another problem that seems to have been put to one side is this.
Long time ago I heard statistic that 20% of Mortgages even with the bigger players AIB, Ptsb, EBS have poor title?ie unreposessable.
Does anyone have info? 
Anecdotally, I hear of slipshod work on having clear ownership and title.


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## dub_nerd (17 Jul 2014)

Gerry Canning said:


> Dereko1969,s comments about start repo on Btl . He could well be correct but if property in Dublin increases another 10% ths year, we Mr Taxpayer will have to fund less of the losses, maybe since market is rising , lets take it (cool).


On the other hand, our property crash was at least a chance to start again with competitive accommodation prices. That chance is now squandered and we will pay the price anyway in loss of competitiveness and attractiveness to foreign employers.


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## Delboy (17 Jul 2014)

Gerry Canning said:


> Dereko1969,s comments about start repo on Btl . He could well be correct but if property in Dublin increases another 10% ths year, we Mr Taxpayer will have to fund less of the losses, maybe since market is rising , lets take it (cool). .



we've been taking it 'cool' for 7 years now.....any BTL's not paying their mortgage should be repossessed asap. Then start on the primary residences after that bad lot has been cleared.
It's a joke at this stage


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## Brendan Burgess (17 Jul 2014)

Bronte said:


> I wonder how they did that research, a cursory reading of AAM would have given one the same conclusions.



Hi Bronte

Good one!

I will notify the authors of the report accordingly.

Brendan


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## Brendan Burgess (17 Jul 2014)

I have struggled through this report.Most of the interesting data is not segregated for PDHs and BTLs. They are two completely different markets, and should be reported on separately. In fact, combining them as they do in most of the charts, makes no sense. 

My main interest in PDHs and this is what I have managed to extract: 



 Total balance outstanding on IO loans| €1.3 billion |Table 1
If the average balance is  |€200k |My estimate
Total number of homes on IO| 6,500 
% in arrears over 90 days|17%| Table 2
Number of homes|1,100 
Average IO period remaining| 4 years|Table 6 
Average LTV as of June 2013|c.120%|Table 6 
Average LTV June 2014| 100%| my estimate


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## Brendan Burgess (17 Jul 2014)

Buy to Lets



 Total balance outstanding on IO loans| €6.1 billion |Table 1
If the average balance is  |€200k |My estimate
Total number of BTLs on IO| 30,000
% in arrears over 90 days|22%| Table 2
Number of properties|6,000
Average IO period remaining| 20 years|Table 5
Average LTV as of June 2013|145%|Table 5
Average LTV June 2014| 120%| my estimate



> 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.
> 
> [there is] a much higher LTV rate for IO mortgages in general and a much higher percentage of IO loans in negative equity, at 82 per cent
> ...



The majority of these cheap tracker, interest only loans were given for apartments in Dublin.  There is no good reason for them to be in arrears. The rental income exceeds the interest payment comfortably, so the only explanation is that  they are strategic defaulters.  They are using the rental income to pay other expenses. 

I can understand that if someone bought a buy to let in Leitrim, they may have no rental income, but anyone with an apartment in a city should not be in arrears.


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## jdwex (17 Jul 2014)

Brendan Burgess said:


> I can understand that if someone bought a buy to let in Leitrim, they may have no rental income, but anyone with an apartment in a city should not be in arrears.




Absolutely. 2 beds where I live (Santry) are now making close to 1200 euro a month (14k a year) . An outstanding mortgage of 300k (at the very most!) and interest rate of say 2% gives interest of 6k a year.


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## Delboy (17 Jul 2014)

Good stuff Brendan...good to hear someone of note call it for what it is. If you can pull together analysis like this, can you imagine what those in the banks are trying to hide! Rents going through the roof and a high numbers of mortgages not been paid for years...are the Rev Comm looking into this to see if tax is at least being paid on the rent!


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## 110quests (17 Jul 2014)

It is interesting reading your extraction from the CB report.

The fact that so many IO trackers on BTL are in arrears and allowed to continue in this mode is extraordinary while at the same time PDH on I+P are hounded when arrears happen.

You estimate in your table 1 that 6500 PDH are IO and are due to pay I+P within 4 years. That sounds like long term IO. Under what circumstances were these type of mortgages granted for PDH ? My understanding was that PD mortgages were all the conventional type P+I .

Could it have been that the mortgages were applied for as BTL but subsequently used as PDH


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## Delboy (17 Jul 2014)

110quests said:


> The fact that so many IO trackers on BTL are in arrears and allowed to continue in this mode is extraordinary while at the same time PDH on I+P are hounded when arrears happen.



There is negligible 'hounding' going on for those not paying mortgages on their PDH...have you seen the stats for those 3yrs + in arrears...truly astounding and still growing. Would love to see that figure broken down into 4,5,6 and even 7years +


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## Brendan Burgess (17 Jul 2014)

110quests said:


> You estimate in your table 1 that 6500 PDH are IO and are due to pay I+P within 4 years. That sounds like long term IO.



I was surprised by that myself. The CB reports that the three main banks gave out home loans which were interest only for 10 years followed by  P+I. I had not heard of this. 



> My understanding was that PD mortgages were all the conventional type P+I .



For the main banks, I had understood that 5 years was the max IO period. BoS gave out full term interest only cheap tracker mortgages. 



> Could it have been that the mortgages were applied for as BTL but subsequently used as PDH



Possibly, but I doubt it.  These sorts of reports usually categorise loans according to their original purpose.  Some of those included under home loans, are now buy to lets, because the borrower has moved on and has let the property.  

In what circumstances would someone apply for a BTL, although their intent was to live in it?  The interest rate was often higher. Although, I suppose if they claimed it was BTL, they might have been given more, as the lender would take the rental income into account.


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## 110quests (17 Jul 2014)

Delboy, when you say 3 years + in arrears do you mean NO payments have been made or that a shortfall occured 3 years ago but  payments have been made in the meantime , resulting in arrears still outstanding from that point.

Eg     Due payment 1000e pm. Over a period of 3 yr arrears of 6000 occur due to shortfall in income at various points in the 3 yr time . Is that 6 months or 3 yrs in arrears?


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## Delboy (17 Jul 2014)

My understanding of the arrears stats are that no payments have been made on the mortgage, in this example, for 3 yrs +.


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## 110quests (18 Jul 2014)

Brendan, someone who has a private residence, acquires a BTL tracker IO for another property , sells PR, and moves to BTL ?    Yes should give rise to questions of reg with Ptrb etc but .......?


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## Brendan Burgess (18 Jul 2014)

110quests said:


> Eg     Due payment 1000e pm. Over a period of 3 yr arrears of 6000 occur due to shortfall in income at various points in the 3 yr time . Is that 6 months or 3 yrs in arrears?



That is 6 months in arrears. 

When the Central Bank reports that someone is in arrears for 6 months, it could be due to any one of the following: 


They have paid nothing at all for 6 months
They missed 6 months' payments 3 years ago, have never managed to pay them, but have been paying the full repayment for the past three years (historic arrears)
They have paid half the payment due every month for the last 12 months
From memory, around 20% of borrowers in arrears have been paying nothing at all for some time.  In other words, they are paying nothing towards their accommodation or if they own buy to lets, they are spending the rent elsewhere.


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## 110quests (18 Jul 2014)

Brendan thank you for that clarification re 6 mths arrears.

It is possible that the 20% in arrears who were paying nothing, were the people to whom the Banks issued legal letters to reach their solution targets. I recall some of the robust comment at the time, but if people were paying nothing, something had to be done to jolt people to the reality.

It is difficult to understand how BTLs were so financially unsound that IO trackers/loans could not have been paid by landlords, recession or not. There were many, many (and we all know some of them) who bought properties to let and had no idea what becoming a landlord meant.

Of course banks facilitated those loans with eyes and ears closed as to person's suitability from a business point and now the arrears are stacking up. I think there is little excuse for most on IO not to make those payments.


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## Brendan Burgess (18 Jul 2014)

110quests said:


> It is possible that the 20% in arrears who were paying nothing, were the people to whom the Banks issued legal letters to reach their solution targets. I recall some of the robust comment at the time, but if people were paying nothing, something had to be done to jolt people to the reality.



Yes, the banks have repeatedly stressed that most of the letters issued were to people who were not engaging.  Some engage immediately and others resume full capital and interest payments. But many just keep their head firmly buried in the sand.


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## paddy19 (27 Aug 2014)

"The rental income exceeds the interest payment comfortably, so the only explanation is that  they are strategic defaulters." 

There are alternative explanations than "strategic defaulter".

Other property in Leitrim bringing in zero rent.
Lost job, no other income.


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## dereko1969 (27 Aug 2014)

paddy19 said:


> "The rental income exceeds the interest payment comfortably, so the only explanation is that  they are strategic defaulters."
> 
> There are alternative explanations than "strategic defaulter".
> 
> ...



You're not quoting Brendan fully, he was talking about properties in Dublin where the rent is significantly exceeding the interest payments.

So why hasn't your Leitrim property been repossessed? Have you engaged with the Bank?


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