Economists warn of ‘time bomb’ on mortgage arrears
A MORTGAGE arrears time bomb is ticking, due to a squeeze on the repayments of a large numbers of investors who bought rental properties. –
These investors signed up to interest-only deals when they bought their buy-to-let properties during the boom. They did this because it costs much less every month than making full interest and principal repayments on the mortgages. But four out of 10 of those who took out an interest-only mortgage to buy a rental property face having to make full repayments in the next two years, research has found. This risks pushing up mortgage arrears, the study carried out by Central Bank economists warns. There is a big risk that these borrowers will be pushed into arrears, as rents are unlikely to cover the cost of making full interest and capital repayments.
Central Bank calculations estimate that moving from making interest-only to meeting interest and principal repayments will result in a four-fold rise in monthly mortgage costs.
This will typically see repayments go from around €400 to €1,700 a month, the Central Bank academic study found.
However, rents vary from €400 a month in Leitrim to €1,230 a month in Dublin, not enough to cover full capital and interest repayments.
The interest-only deals were usually for 10 years, and now 43pc of investors with this kind of deal are coming to the end of it. They are set to be forced to make full capital and interest repayments.
The study, written by Jane Kelly, Gerard Kennedy and Tara McIndoe-Calder, found that arrears for landlords with interest-only arrangements in place tend to be much higher than for mortgages where full repayments are being made. Many of those who took out the interest-only investor mortgages are on tracker rates, which means the repayments are the lowest in the market. More than four out of 10 of the interest-only deals expire in the next two years.
“The concern is that when they do, some borrowers may experience difficulty meeting the higher repayment schedule,” the Central Bank economists concluded.
Most investor mortgages were taken out between 2005 and 2008, the height of the boom.
The latest statistics from the Central Bank show that the number of buy-to-let mortgages in arrears rose in the period up to March at a time when residential arrears fell back.
There are close to 40,000 buy-to-let mortgages that are in arrears. This is a far higher proportion than the number of residential mortgages where payments are not up-to-date. Central Bank governor Patrick Honohan (pictured) has been among those who have criticised banks for failing to tackle high levels of default among mortgaged landlords.
He called for these properties to be repossessed