Interest-only mortgages depended on a rising market and now many in the small-time landlord sector smell trouble, writes JACK FAGAN
JUST WATCH how the storm clouds gather over the interest-only mortgage market. To the casual observer, this banking option had particular appeal with investors at the height of the property boom. They relied on capital appreciation to keep values rising until it was time to flip on the property. The formula worked like a treat until the housing bubble finally burst and caught many people out.
But contrary to popular belief, the interest-only terms were not entirely confined to investors buying rental properties and developers anxious to get their hands on even more development land. No, the interest-only candy pot was also raided by an estimated 10,000 accountants, lawyers and other professionals who spent between €1 million and €2 million each on buying homes with a typical loan-to-value mortgage of 80 per cent. Ominously, the Irish Brokers Association is now warning that, with the value of many of these homes down by 50 per cent, “another disaster is waiting to unfold”.
So, you might well ask, what has changed and what is the reason for the sudden concern?
In a nutshell, most of the banks are refusing to extend interest-only facilities where a fixed time period applies. Once the contract has to be renegotiated, the bank may well try to switch the mortgage to the more expensive variable interest rate – currently anywhere between 4.2 and 4.6 per cent.
If the borrower is lucky enough to be on a tracker mortgage (a serious loss maker for the banks) then he or she can stick to that rate for the duration of the loan as long as they repay the principal sum involved.
Frank Conway of the Irish Mortgage Corporation has voiced concern that the refusal by the banks to extend interest-only facilities could lead to a “bloodbath in the small-time landlord sector where many properties were financed through interest-only facilities in the expectation that this market was all about capital appreciation and a relatively quick exit”.
Conway cites an example of one investor coming off a five-year interest-only loan facility who has been denied an extension. The borrower’s disappointment is understandable considering that he has been on an incredible deal – an interest-only repayment of only 1.95 per cent – made up of the ECB rate of 1 per cent plus a bank charge of 0.95 per cent.
Clearly, the bank has been subsidising the mortgage for at least two years and, with all the banks now looking at ways of bumping up profits, this arrangement – and many more – will inevitably end. The €300,000 mortgage has been costing only €487.50 a month but, with no capital paid down over the past five years, the full loan is still repayable. Even with the borrower on a tracker mortgage rate of 1.95 per cent, the new capital and interest repayments over the remaining 20 years will rise to €1,510 per month – an increase of just over €1,023 a month.
The other option for the borrower is to remain on an interest-only mortgage but, in return for that concession, to switch from a tracker to a standard variable mortgage of between 4.2 and 4.6 per cent. Even at the lowest 4.2 per cent rate, an interest-only loan repayment would rise to €1,050.
Many of the 10,000 “professionals” facing deadlines on their interest-only mortgages have had their incomes cut by up to 75 per cent over the past two years, according to the Irish Brokers Association.
It says that until now the low interest rates camouflaged the problem but, with rates now moving up, very few can afford to make the required capital repayments on these loans of €3,000 to €5,000 per month.
Many of those in the firing line will be weighing up their options in the coming weeks. At the back of their minds they will be only too well aware that lending institutions are generally prepared to extend interest-only facilities on a main residence rather than watch the mortgage arrears rise to dangerous levels. It is all to play for yet.