Brian Hayes urges code on interest-only mortgages
Banks could face crisis as lump payments on mortgages become due, says MEP
Brian Hayes MEP: Central Bank is “behind the curve” in dealing with interest-only mortgage customers. Photograph: Eric Luke
Fine Gael MEP Brian Hayes MEP has called on the Central Bank of Ireland to develop a code of practice for domestic banks on how they should deal with interest-only mortgage customers in a fair manner.
He claimed banks could face a serious arrears crisis in the coming years as interest-only mortgages become due for final repayment involving large lump sums for the borrower.
“An interest-only mortgage is a specific type of loan where the borrower only pays back the interest of the loan on a monthly basis,” he said. “When the mortgage ends, the borrower then has to pay the original amount that was borrowed.
“This means that if a customer takes out a €200,000 loan, they have to pay the full €200,000 immediately at the end of the mortgage term. The problem with these loans is that borrowers are often not in a position to pay the full amount in one go at the end of the term.”
Mr Hayes said the Central Bank needed to provide a code of practice for banks on how to deal fairly with interest-only mortgage customers.
“They are behind the curve on this,” he said. “A great deal of interest-only mortgages were taken out between 2005 and 2008, 43 per cent of which were for 10-year terms. This means that over the next 12 to 24 months, these loans will mature. Banks could be faced with a serious situation of borrowers unable to meet their final repayments.”
He said the Central Bank needed to conduct a study to assess the exposure of Irish banks to interest-only mortgages.
“So far, the Central Bank has only carried out an academic study of the issue. We do know that, as of June 2013, interest- only mortgages of all types were valued at €13.1 billion. This accounted for almost 15 per cent of the total mortgage market in Ireland.”
Mr Hayes said the Central Bank needed to outline a number of solutions in a code of practice: “First, banks should be able to extend the term of an interest-only mortgage by at least three years. Secondly, customers should be given credible options to switch back to a normal mortgage where capital as well as interest is paid monthly.
“Thirdly, banks should accept overpayments at different stages of the mortgage in order to reduce the final balance. Flexibility needs to be shown to customers here.”
A spokeswoman for the Central Bank said there were provisions in the consumer protection code relating to interest- only mortgages. These required the lender to carry out an assessment of a customer’s ability to repay the principal at the end of the loan term.
In the case of an interest-only mortgage with a duration of less than the term of the loan, a lender must carry out an assessment to ascertain the consumer’s ability to repay the capital and interest amount that would apply at the end of the interest- only period.