The New Beginning Mortgage Proposal

Brendan Burgess

Brendan Burgess

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The New Beginning’s Mortgage proposal would cost the taxpayer €400m a year

 This proposal has been presented as some magic “win,win,win” solution.
It is nothing of the sort.

It is presented as “not being debt forgiveness”, but it is a form of debt forgiveness.


Mortgage| €200k
Interest at 5%| €10k
Affordable mortgage|€120k
Interest free warehouse|€80k
Monthly repayment to pay off affordable mortgage over 20 years|€800
Initial monthly payment |c.€600
Annual increase in monthly payment|3%


The proposal is that a borrower would devote a maximum of 35% of their net disposable income to their monthly repayments.


The mortgage would be split in two and the monthly repayments would pay off Part A in full. Part B would be warehoused and would not attract interest.

In the above case, the bank warehouses €80,000 and charges no interest on it. So the bank, i.e. the taxpayer, will be subsidising this mortgage by €4,000 per year.

As there are 100,000 struggling mortgages, the cost to the taxpayer would be €400m a year.

Even if we could afford to pay this I don’t think we should. We are subsidising a person’s interest while they are repaying the capital on their mortgage. This makes no sense at all.

The state pays around €80m a year in Mortgage Interest Supplement for those who can’t pay the interest on their mortgages. If the government wants to allocate more money to this scheme, then they can subsidise the deferred interest so that it does not accumulate. But they should not be using taxpayers’ money to enable a homeowner to pay the capital off their mortgage.
 
What else is wrong with the New Beginning Proposal?

It picks figures such as €340k and €2,400 Net Disposable Income to make it work.

It must assume that NDI rises by around 3% a year. Not a very reasonable assumption at the moment.

What happens if the borrower's NDI falls? Do they then dump more of the mortgage into the warehouse?

What happens if interest rates rise as expected? Even more goes into the warehouse.

The Deferred Interest Scheme makes the arbitrary, but reasonable, assumption that if you can pay 66% of the interest on your loan, then it is sustainable for the next 5 years.

If interest rates rise or you can no longer afford 66% of your interest, then it deems your mortgage as unsustainable. It is very important that borrowers and banks recognise a mortgage as unsustainable at the earliest possible stage. They can then plan an exit strategy.

Under the New Beginning, there is a real danger that borrowers and banks will be stuck with unsustainable mortgages for the long term.
 
Séamus Coffey has done an excellent and more extensive analysis of the New Beginning proposal here "New Beginning" Mortgage Proposal

In total, over the 31 years of the mortgage there would be payments of just under €512,000 made under the New Beginning plan. The New Beginning plan is at least €58,000 short in order for the mortgage to be fully repaid.

It is likely that it is short by much more as the capital owed is decreasing by much less in the reduced payment period of the New Beginning proposal so the amount of interest that should be charged is greater than would be charged on a traditional mortgage.
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and...

The Sunday Post article says:
Does that involve debt forgiveness? By any rational standard, it does not. All it involves is the bank forgoing some income and profit. There is no capital implication for the lender’s balance sheet and no negative consequence for the taxpayer. The bank is repaid in full and the borrower owns his home.
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Of course it is debt forgiveness. The Frontline and the article go off on a tangent about some sort of “shelved balance” which is “warehoused” on which no interest accrues. This is just a deflection.



...The bank is likely to be losing out on €80,000 of payments under this plan.
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and

This scheme is not free and will have a cost. If the average cost per household is €80,000 then the cost of implementing this scheme for 50,000 households will be €4 billion. This is not cheap and this proposal should not be viewed as a “win, win, win”.
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I estimated that it would cost the taxpayer €4,000 a year for 100,000 borrowers or €400m a year.

Séamus comes up with a higher cost per borrower €78,000 but fewer borrowers 50,000.
 
OK- I see the morality of your Point of view i.e. subsidizing other peoples homes repayments.

In that case you must see that tracker mortgages are being subsidized specifically by variable rate holders (because this is the only way banks can now raise money). If the banks were not bailed out by us, would those tracker rates hold up you think? No. It's Irelands dirty little secret that the 'moral police' always fail to point out probably because two thirds of mortgage holders own trackers.

This is my situation - bought our first at height of boom in 2005 for 250K, not at all extravagant. Now in NE and travelling long distances and working long hard hours to fund mortgage and family (no cushy croke park deals here). Also, never got the chance to trade up or go on a tracker mortgage and still owing 220K variable rate mortgage.

Give me one reason why I should be a serf to those who benefited in a much greater way in this economy i.e. managed to trade up and get trackers. Is there any alternative but to abandon the mortgage and feck off out of this country?

Now, I'll sit back and read all usual comments like "well it's your problem, I'm not responsible for your bad investments, but I have a tracker and a comfortable home - did I tell you we sold our last home for 350K to some sucker and it's now worth half that, but that's the markets, so feck you, stump up and shut up"
 
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