Restructured mortgages: how they are made up, Q&A

Figures published by the Central Bank on Monday showed that over 55,000 homeowners were more than three months behind in their mortgage payments at the end of June.

Of these, roughly half have approached their lenders to arrange a restructuring of their debt. That’s the good news; the downside is that the other half have not – and, given that 70 per cent of those in arrears are more than six months behind in their payments, it means a significant number of people are building up a major debt problem.

And the problem is getting worse. Given the trend in mortgage arrears over the last year, the number of borrowers in trouble with their loans will almost certainly top 60,000 by the end of next month.

What should I do if I find myself unable to pay my mortgage?

If you find yourself slipping behind with your mortgage payments, you should immediately contact your lender, who is obliged to have specialist staff at each branch specifically to deal with such issues.

If you have missed some or all of your mortgage payments for three months, the bank will contact you, outlining the risks of going into arrears and the process available to help you meet mortgage arrears, including debt restructuring.

What debt restructuring options are available?

The figures published by the Central Bank this week give an insight into the types of restructuring that are available. They include:

* Interest-only – this is where you would have to pay only the interest on your loan for a period of time. The capital balance (the underlying loan) remains unchanged. This approach accounts for 37 per cent of all restructuring in place at the end of June – over 25,000 home loans.

* Reduced payment – this is where the borrower pays some but not all of the monthly mortgage payment. Just over 20,000 restructured loans at the end of June were using this process. Of these, over 10,000 were paying a monthly sum that was greater than just the interest on the loan but less than the full monthly payment. The other half were paying an amount each month that was less even than the monthly interest bill.

* Term extension – this allows the borrower to pay the mortgage over a longer period of time. As a result, your monthly payments would be lower. However, you will end up paying more interest over the life of the loan. Again, this system was agreed between banks and 9,400 borrowers at the end of June.

The big impediment is that many home loans during the boom were already for periods of close to 40 years, in many cases bringing the loan’s maturity close to a borrower’s retirement age. Lenders remain most unlikely to extend the term of a loan beyond retirement.

* Arrears capitalisation – if you are in arrears and unable to pay them off at this time, a lender may agree to add the arrears to the capital of the loan and spread the repayments over the full term of the loan. About 9,000 borrowers were on such an arrangement, according to the latest restructuring figures.

* Payment moratorium – this will see lenders freeze payments on the loan for a certain period, possibly while someone who has been made unemployed looks for work. However, just 3 per cent of recent restructurings have featured this option and lenders will be reluctant to totally freeze payments unless there is a reasonable prospect of payments resuming within a reasonably short period.

And what happens the arrears that build up during such arrangements?

Interest will continue to build up on any arrears owing but, as long as you co-operate in the process, the lender will not be able to impose additional charges, such as penalty or surcharge interest.

They are also not allowed to force you to surrender a favourable interest rate as part of any deal, such as a tracker mortgage rate.

Is that it?

Not quite. Some lenders will agree a hybrid solution that includes elements of more than one of the above.

Also, lenders are working towards what is called an “advanced forbearance” proposal outlined in the review group report.

This would see the borrower paying as much as as they can afford – at least two-thirds of their monthly interest bill – and deferring the balance for up to five years.

The unpaid interest will not attract additional interest charges during the period.

Is the lender obliged to offer me some form of restructuring?

No, the lender is not obliged to offer restructuring but, if they refuse to do so, they will have to provide you with their reasons in writing.

Generally, banks will only refuse any restructuring if they feel that your financial situation is so poor that restructuring will not work or that they have no confidence in your intent to meet your obligations given your track record.

What if none of those options suits, or the lender won’t agree to them?

Then you are down to settling the mortgage. This can be done in a number of ways:

Voluntary surrender means agreeing with the lender that they can take full ownership of your home – but you will still be liable for any portion of the mortgage they do not realise from selling on the property.

* Voluntary sale involves you selling your home now with the bank getting the balance outstanding on the mortgage from the proceeds of the sale.

* Trading down could provide a solution but with many homes in negative equity, you could be left with little from the sale of your present home to buy a smaller one after the bank has settled its mortgage account.

And what about debt forgiveness?

There is, as of now, no organised debt forgiveness programme and the expert group on mortgage arrears came out against it. Such a programme would run the risk of people simply deciding not to pay their debt.

However, as Minister for Finance Michael Noonan said yesterday, the recapitalisation of the banks means that they have the resources on hand to deal with particularly hard cases.

At this point in time, there have been a number of instances of debt forgiveness but these are being negotiated on an individual basis.