30,000 interest-only mortgage moves

UP to 30,000 homeowners have been forced to switch to interest-only payments on their mortgages because of financial difficulties.

In many cases, banks are encouraging customers to switch as it stops accounts falling into arrears and it keeps any struggling loans off their mortgage books.

However, while opting for interest-only payment appears attractive, brokers have warned it substantially increases the cost of the mortgage in the long run.

A homeowner on a €300,000, 30-year mortgage with a 3% interest rate who switches to interest-only payments for two years will be forced to pay almost €6,500 extra over the term of the loan.

The standard monthly repayment would be €1,264, whereas an interest-only payment would be €750 – a saving of €514 per month as the repayment is reduced by 40%.

However, opting for this for two years would add an extra €6,457 onto the mortgage over the term of the loan, according to the director of the Irish Mortgage Corporation, Frank Conway.

He said he is seeing an increase in people seeking the interest-only option as they struggle to pay bills.

Chief executive of the Irish Brokers’ Association Ciaran Phelan said, although switching to interest-only is often necessary, this move is not ideal. “People are increasing their costs over the longer term and on this basis are simply servicing the bank’s assets.”

Recent figures from the Central Bank showed more than 28,000 homeowners are three months behind with mortgage repayments. Some 19,185 of those are more than 180 days in arrears.

Director of the Mortgage Finance Company Kevin McNerney said many people had bought a property and taken out a large mortgage based on a multiple of their salary under the illusion that their salary would continue to increase each year and paying back the mortgage would never be a problem.

“This has obviously changed, with many people facing significant pay cuts in recent months and the number of people who are struggling to meet their monthly mortgage repayments has increased significantly.”

Meanwhile, figures show the number of home owners seeking mortgage interest relief has soared by more than 500% since 2007.

Last year, almost 19,000 people applied for mortgage interest relief which is a huge increase on the 2007 figure of 3,700.

In 2008, this figure had jumped to over 8,800 before ballooning to almost 19,000 last year. Almost 2,000 people have applied for the payment up to February 12 of this year.

The mortgage interest supplement provides short-term income support to eligible people unable to meet mortgage interest repayments in respect of a house which is their sole place of residence.