Posted August 5th, 2010
Repayment arrears on home loans are on the rise in Ireland. Recent reports suggest that the amount of homeowners struggling to meet their mortgage repayments has almost doubled in the last 12 months. With almost 200,000 homeowners also likely to be in negative equity, the situation is looking grim for many. Over 30,000 home owners are known to be in arrears of three months or more and a probable 100,000 could be in default of one month’s repayment or more. There is over Ђ120 billion of residential mortgages inIreland, representing almost 800,000 homes.
The fundamental way in which lenders can enforce the security on defaulted home loans is through repossession by way of Circuit or High Court legal orders for possession. The properties are then sold and the proceeds applied to the outstanding debt less any costs incurred. For many, the repayment problem does not cease at this point. Many evicted borrowers will find themselves facing a sizeable remaining debt to repay due to negative equity. The borrower can then be pursued for the shortfall through further litigation with enforcement by way of instalment order or garnishee orders of income. Individuals and families can face further stress and anxiety following the already traumatic process of losing their home.
Of late, significant numbers of repossessions have yet to materialise in Ireland but it is worrying that the banks current enforcement ceasefire may have to end. It’s unrealistic to hope that lenders will not enforce their security eventually where long-term arrears are mounting. If arrears continue to increase, as the trends are showing, the courts will be flooded with motions for possession orders.
The Financial Regulator’s code of conduct on mortgage arrears and the recent announcement by the Government to implement measures proposed by the Mortgage Arrears Review Group will offer some comfort to those facing unaffordable mortgage repayments. There is a clampdown on penalty interest being applied to mortgage balances which is a welcome measure. Interest only periods and payment breaks are to be readily available to those struggling to meet their repayments. However, in reality those facing more long-term unaffordability may only be prolonging the agony at a high cost.
Let’s look at an example of what we mean. A Ђ300,000 mortgage over 30 year term with an interest rate of four per cent costs Ђ1,432.25 per month. If in the fifth year, the borrower took a six month payment break, the loan would need to be extended by three years to maintain the repayments at the previous level of Ђ1,432.25 on an ongoing basis. This would effectively cost the borrower in excess of Ђ22,000.00 in extra interest. Imagine the scenario with a sub-prime lender charging interest of eight per cent. The results of payment breaks and accruing unpaid interest could be catastrophic.
Interest only periods – while having less impact – will also end up costing in the long run. Many people with long-term income reductions will never be able to recommence capital repayments. A prolonged interest only period may eventually make paying off the capital unaffordable. Most young home buyers in the last 10 years took out mortgages with the maximum term available to retirement age. A substantial interest only period could make the capital repayments unaffordable in the future and thus force a term extension into retirement age.
Debt forgiveness is a term that has been well debated in recent months but is not on the agenda for consumers. The economic experts would have us believe that it is not feasible for banks to write off large chunks of residential borrowing. This is little comfort for those struggling home owners watching NAMA slice through the development finance and large commercial loans that they are taking over. One wonders if a more short-term and affordable measure was ever considered. A specific period of capital only repayment would provide many borrowers with an affordable solution that would not inhibit their long-term ability to meet their mortgage commitments. There is an obvious cost to the lender but in reality, they will save in the long run on costly litigation and debt recovery processes. The tax payer would also benefit as the current spend of Ђ64 million on mortgage interest supplement would be substantially reduced. It is measures such as this that will ultimately provide reasonable and affordable resolution to mortgage arrears.
Because of the complex situations mortgage holders find themselves in, a holistic approach to debt and financial management is required. Many people are struggling to meet other forms of credit repayment in addition to their mortgages. It is vital to assess everything from mortgage to household expenditure to secured finance and other unsecured debts before putting any repayment plan or proposal in place. Many secondary creditors are the ones to shout loudest in the hope to secure their position on the repayment ladder. The vigorous approach by certain institutions can cause struggling debtors to make the wrong choices in prioritising their disposable income. The circumstances which have led to the lack of affordability must also be assessed. Long-term problems require long-term solutions. Interest only and payment break periods will only bide time in the short-term.