Key Post Being in arrears is not always as bad as it appears

Brendan Burgess

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John

John has a mortgage of €200,000, interest-only, at 4.5% SVR.
His repayments are €9,000 a year or €750 per month
He makes these on time, every month.
At the end of the year, John owes €200,000, the same as he owes at the beginning of the year.
He is happy because he is not in arrears.
The bank is happy because he is not in arrears.
The Central Bank is happy because he is not in the arrears statistics.
The government is happy because, everyone else is happy.

Mary
Mary has a mortgage of €200,000 at 4.5% ,repayment mortgage, with ten years left.
She is being charged the same interest as John, €9,000 a year.
But she is paying €1,250 per month - i.e. €750 interest + €500 capital
At the end of the year, she has reduced the balance on her mortgage by €6,000 to €194,000.

So who is better off? Mary who owes €194,000 or John who owes €200,000?

After 1 year
|John|Mary
Mortgage balance|€200,000|€194,000
Arrears balance|0|€10,000
In months|0|5 months
Mary is unhappy because she is 5 months in arrears and is worried about losing her house.
Her lender is unhappy because her loan is not performing and so they have to make a provision against it. They have also got to allocate resources to the MARP.
The Central Bank is not happy because their arrears statistics are so high and the banks are doing nothing about them.
The Government is unhappy because we have such high arrears.
 
Now let's move on to what it looks like after 3 years

After 3 years
|John|Mary
Mortgage balance|€200,000|€181,000
Arrears balance|0|€32,000
In months|0|16 months
Now, everyone is panicking.
Mary is now over a year in arrears.
She is one of 34,000 people who are over a year in arrears. That represents 6% of all mortgage holders.
 
Now let's introduce Patricia

Patricia has a mortgage of €200,000 @4.5% SVR , interest-only.

She has made no payment at all for three years. Not a cent.

Her balance balance has now increased to €228,000.

Patricia is in real difficulty but the figures suggest that she has lower arrears than Mary.
 
Now let's look at the total position.

According to the latest Central Bank figures, the total arrears for all 105,000 borrowers who were in arrears was €1.6 billion or an average of around €15,000 each.

Some of that €1.6 billion is arrears of capital. We have just no idea, how much.

Given that full-term interest-only mortgages are very rare for home loans, I would estimate that around half of the arrears is capital not paid off according to schedule.

The following information would give us a much clearer view of the mortgage problem:

How many borrowers have paid nothing at all on their loans over the last 12 months. (I would guess very few)
How many borrowers have a higher balance now than they had 12 months ago. This measures the extent to which they are not servicing the interest on their mortgage.
 
Afraid your post does not make sense to me. Why is John not in arrears if he has the same type of mortgage as Mary. Unless he took out an interest only mortgage at the start for the full term then with interest only payments arrears are accruing. the arrears are the capital portion he has not repaid in accordance with his agreement. Also John will ultimately have to start paying something off the capital or if an interest only mortgage will have to pay the full balance at the end.
 
Hi Thrifty, see the second line of the first post

John has a mortgage of €200,000, interest-only, at 4.5% SVR.
Click to expand...

I have since highlighted the interest-only bit.

That is the point I am trying to make. The arrears in Mary's case, are arrears of capital.

But the overall point is that Mary is seen as in arrears, while John is not.

I don't think that the way we calculate arrears provides much useful information.
 
After 3 years ( if I am reading it properly)....

John owes 200,000. no arrears, he is sticking to original loan agreement.

Mary owes 213,000, in arrears of 32,000 capital

Patricia owes 228,000, in arrears of 28,000 interest

John is better off in that he owes less. He isn't repaying any capital, but thats the interest only agreement. We don't know if John would have difficulty repaying capital and interest if he switched to capital and interest like Mary and Patricia. Maybe John is sitting on a 20 to 30 year time-bomb and won't ever be able to repay the capital element.

Yes, with the total mortgage arrears figure of 1.6 billion, it would be useful to see its makeup, split up between capital arrears and interest arrears, with an aged analysis of each.
 
I'm sorry i must be a bit thick but i though from the reading Mary was on an interest only mortgage also. The numbers still do not make sense to me however because although by making short payment Mary is not paying in accordance with her agreement and on paper is €10000 in arrears (with the original agreement), this is not added to the loan balance. She has repaid interest and repaid €6000 of the capital- now while she should have paid €16000- it doesn't mean they add that €10000 to the loan balance.
 
According to the Table Mary owes €181k. She is better off than John because she is repaying capital. She is 32k in arrears because her agreement with the bank says she should owe them €149 under the terms of the mortgage.
 

I think that's the whole point. Mary's loan balance is lower, but on a reckoning of the arrears position she looks worse off. It's an interesting thought experiment: arrears don't tell you anything about the borrower's actual position or, more importantly for the wider economy, the lender's.
 
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