Irish banks could face an arrears crisis when interest-only mortgages are due for final repayments
Brian Hayes MEP today said that the Central Bank of Ireland needs to develop a code of practice for Irish banks on how to deal with interest-only mortgage customers in a fair way. Mr. Hayes warned that banks could face a serious arrears crisis in the coming years as more and more interest-only mortgages become due for final repayment.
“An interest-only mortgage is a specific type of loan where the borrower only pays back the interest of the loan on a monthly basis. When the mortgage ends, the borrower then has to pay the original amount that was borrowed. This means that if a customer takes out a €200,000 loan, they have to pay the full €200,000 immediately at the end of the mortgage term. The problem with these loans is that often borrowers are not in a position to pay the full amount in one go at the end of the term.
“The Irish Central Bank needs to act quickly and provide a code of practice for Irish banks on how to deal fairly with interest-only mortgage customers. They are behind the curve on this. A great deal of interest-only mortgages were taken out between 2005 and 2008, 43% of which were for 10-year terms. This means that over the next 12-24 months, these loans will mature. Banks could be faced with a serious situation of borrowers unable to meet their final repayments.
“But we need to know the immediate scale of the problem; the Central Bank needs to conduct a study to assess the true exposure of Irish banks to interest-only mortgages. So far, the Central Bank has only carried out an academic study of the issue. We do know that, as of June 2013, interest-only mortgages of all type were valued at €13.1 billion. This accounted for almost 15% of the total mortgage market in Ireland.
“I believe the Central Bank should address this problem by outlining a number of solutions in a Code of Practice. First of all, banks should be able to extend the term of an interest-only mortgage by at least 3 years. Secondly, customers should be given credible options to switch back to a normal mortgage where capital as well as interest is paid monthly. Thirdly, banks should accept overpayments at different stages of the mortgage in order to reduce the final balance.
“Irish banks need to act in a fair manner and provide practical restructuring plans to these borrowers. Flexibility needs to be shown to customers here.
“The Financial Conduct Authority (FCA) in the UK issued guidance for banks in 2013 which has proved useful to UK banks. In the UK last year, banks restructured 300,000 interest-only mortgages from their books in an effort to manage the potential time-bomb coming down the tracks.
“We must remember that between 2005 to 2007, more than 550,000 Residential Mortgages were provided by Irish Banks and Building Societies to a value of €108 billion. Many of these were interest-only mortgages, which were particularly offered to buy-to-let customers.”