Central Bank warns of mortgage arrears timebomb

The Central Bank has warned of a potential mortgage arrears time bomb as the high number of interest-only loans taken out during the boom revert to full-repayment arrangements.

While interest-only arrangements have been widely used as a means of forbearance in the current arrears crisis, just over 8 per cent of the total mortgage loan book - equating to €7.4 billion - were originally issued on an interest-only basis.

Most of the loans were taken out by buy-to-let investors on tracker mortgages between 2005 and 2008, essentially at the peak of the credit-fuelled boom.

In a research paper published today, the Central Bank found that interest-only mortgages were more likely to be issued to buy-to-let borrowers in Dublin and for the purchase of apartments.

Its research, which is based on data from the three main Irish mortgage providers, noted that the rate of arrears on these loans were higher than on standard mortgages, even though the repayments are relatively smaller.

Perhaps most worryingly, the report indicated that 43 per cent of these mortgages were due to revert to principal-and-interest repayment arrangements within the next 18 months.

The resulting higher repayments for these borrowers could lead to a worrying increase in mortgage arrears, the Central Bank warned.

The research also found that 44 per cent of the buy-to-let interest only borrowers will be beyond retirement age when their loans are due to start full repayment terms.

However, it said there were 14 years on average until these borrowers retire, allowing them some time to establish strategies to cope with the additional repayments.

The bank’s report, which assessed the loan characteristics of interest-only mortgages in the Republic, warned that the scale of the mortgage arrears remained a significant threat to economic recovery.

Though the level of mortgage arrears has moderated, more than 16 per cent of mortgages linked to principal dwellings and nearly 30 cent of those linked buy-to-let properties are still in arrears of at least 90 days.

The main Irish banks have consistently been criticised for failing to tackle the high number of defaulting buy-to-let landlords on their books.

In their conclusion, the report’s authors - Tara McIndoe-Calder, Jane Kelly and Gerard Kelly - said their analysis highlighted a number of concerns about the interest-only segment of the mortgage market.

The fear is that many borrowers will be unable to meet their repayment schedule when the interest-only period elapses, they said.

“Evidence suggests that the switch from interest only to principal-and-interest has tended to trigger arrears in the past for these borrowers, with over 90 days arrears rate much higher than for other buy-to-let borrowers.”

A second concern was the age-profile of these borrowers given that a significant number will be at retirement age when these loans are due to switch, they said.

“Thus at a time when most people are switching to a reduced income, repayments on their debt will increase significantly.”

One possible mitigating factor is that there is still scope - on the basis of recent trends - for house price appreciation before this happens, they said.