Interest-only mortgage ‘time-bomb’

The mortgage arrears crisis that has remained stubbornly present in the economy could worsen in the coming years as a result of higher repayments on certain mortgage types, the Central Bank has warned.

The interest-only period on more than 40% of original interest-only mortgages is set to expire in the next two years.

This will result in increased payments for 21,500 mortgage holders, many of whom may not be able to afford the increases and fall into arrears, according to an economic letter released yesterday by the Central Bank.

“The interest-only period expires for 43% of these loans in the next 24 months. The concern is that when they do, some borrowers may experience difficulty meeting the higher repayment schedule.

The report also warns of the age profile of the borrowers that will be affected — with 44% due to be beyond retirement age when the change comes into effect.

Between 2005 and 2008, interest-only mortgages, which offered the chance to make a profit on investment properties based on the assumption of growing house prices, became increasingly popular with buy-to-let investors.

Irish Mortgage Holders Association director David Hall yesterday said that the expiry of interest-only periods would affect two cohorts of people: those who bought an additional property as an investment, as they were advised to do; and those who bought multiple properties with the view of “flipping them on for a profit”.

Describing the situation as a “major issue” and a “timebomb”, Mr Hall said that many mortgage holders will simply not be able to afford the higher repayments and warned that many could jeopardise their family home trying to service the repayments on the buy-to-let property mortgage.

Mr Hall also said the banks had chosen not to deal with problems in the buy-to-let sector and asked why more repossessions had not been made on these properties.

The reason, he suggested, was an “intended manipulation” to push up prices by not repossessing and re-releasing properties onto the market, with just a hundred or so family homes and buy-to-let properties being released in the second quarter, while banks have 1,500 in their possession.