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Saturday 16 December 2017

Banks share blame for time bomb of interest-only loans

JUST when it seemed as if the mortgage crisis was easing, a new timebomb threatens to explode.

New research by the Central Bank shows that borrowers will have to start repaying capital on almost half of all interest-only mortgages over the next two years.

Even as the economy begins to gradually recover, the mortgage crisis continues to cast a dark shadow.

The quarterly Central Bank mortgage arrears statistics show that a third of all homeloans are either in arrears and/or have been restructured.

However, there has been some relief on the mortgage arrears crisis in recent quarters with the number of homeowners and investors behind on their repayments stabilising.

While the numbers involved, almost a quarter of a million loans, are absolutely enormous at least the problem had stopped getting worse.

Or so we thought. Just when it seemed as if we were getting our arms around the problem, things start getting worse again.

During the boom years - when it seemed as if property prices would rise forever - many buyers, especially investors, purchasing buy-to-let properties opted for interest-only loans.

The idea was that, by not repaying any of the principal, the monthly repayments would be lower and more likely to be covered by the rent.

But what about the principal? Surely, I hear you say, the money borrowed by the investor had to be repaid.

Sure weren't property prices going to keep on rising and the loan would be repaid when the property was sold, leaving a tidy profit for the investor.

That was the theory, at least. Unfortunately, as often happens in life, reality didn't conform to expectations. Instead of rising, property prices collapsed with average house prices down by 50pc throughout the country from their 2007 peak.

relying

Just for good measure, rents - which investors had been relying upon to pay the interest on their mortgages - also fell.

And now an already bad situation looks like it's going to get even worse.

When the banks were advancing these interest-only loans they inserted a sting in the tail. This was that the borrower would have to start repaying the principal after a fixed period, usually 10 years from when the loan was first drawn down.

At the time, most of the interest-only loans were advanced between 2005 and 2009, no-one thought that the requirement to start repaying the loan after a fixed period was anything more than a formality.

They do now. A Central Bank research paper published this week shows that principal repayments are due to start on 44pc of all interest-only mortgages within the next two years.

By postponing principal repayments for so long, borrowers will find themselves facing a huge increase in their monthly repayments as, in addition to making normal principal repayments, they also have to make up the backlog created by the 10-year interest-only period.

But weren't these interest-only borrowers savvy investors who knew what they were getting into - of the €7.4bn of interest-only mortgages €6.1bn (82pc) are to buy-to-let investors? Why should the rest of us shed a tear for speculators who took a chance and lost?

While such an unsympathetic attitude might be fine in theory the reality is somewhat different. The Central Bank paper shows that almost half of those with interest-only mortgages, 44pc, are aged 65 or over.

What we are dealing with here are mainly novice investors who tried to use the booming mid-noughties housing market to fund their pensions - with utterly disastrous consequences.

Instead of boosting their retirement income these unfortunates are confronted with the worst of all possible worlds.

Not alone have the hoped-for profits from the sale of the rental property failed to materialise, it is now worth about half of what they paid for it and they are facing a huge increase in their monthly repayments at a time when the rental income isn't even covering the interest payments on the loan.

While a younger person might, given time, be able to recover from such a financial catastrophe, the one thing most older people don't have is time.

impoverished

Instead, they face the prospect of an impoverished retirement with whatever savings they had accumulated wiped out by their misadventures in the property market.

So what can be done to help these people? There is little doubt but that these people were aided and abetted by the banks. Even at the time there were those, including yours truly, who questioned the wisdom of interest-only loans. The banks can't claim that they weren't warned.

Even worse, the fact that so many of these interest-only loans were to people now aged over 65 suggests very strongly that the banks deliberately targeted this age-group.

Now that it has all gone horribly wrong, the banks can't walk away from that responsibility.

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