Mortgage hike threat to cushion bank debt
Published 21/02/2012 | 05:00
THOUSANDS of homeowners face higher mortgage repayments because of new personal insolvency rules, it emerged last night.
The new rules mean some of the most hard-pressed households will get part of their mortgage debt written off.
But other customers face the prospect of higher interest rates on their mortgages, as banks cushion themselves against the risk of these losses.
Any rise in rates would hit those customers on variable mortgages, while people with tracker mortgages would not be affected.
Bank of Ireland boss Richie Boucher yesterday admitted he was looking at raising the interest rates on home loans to compensate for this added "risk".
He said the new insolvency laws, due later this year, could mark a "fundamental" change in the playing field for banks and make mortgage lending more risky.
"We price for risk," he said, implying that the cost could be passed on to customers in the form of higher interest rates.
It would mean that the bank increases its variable interest rate for existing customers, or charges a higher rate to new borrowers -- potentially putting the bailed-out bank on a collision course with the Government.
However, it is highly likely other banks will be thinking along the same lines, and if Bank of Ireland moves to increase its rates then it will set a precedent.
It is understood at least one other bank is considering similar measures.
Bank of Ireland gave out half of Ireland's new mortgages last year.
About a third of Bank of Ireland's mortgage holders are on variable rates, and at a typical rate of between 3.4pc and 3.84pc are already paying almost double the interest of those with tracker mortgages.
People on tracker mortgages will not be hit by any rises instigated by the banks as the European Central Bank controls tracker rates.
The threat of higher interest rates comes a week after international ratings agency Moody's said up to a quarter of the mortgages in Irish banks were vulnerable to being written down under the new insolvency rule, which could trigger "widespread debt forgiveness".
Mr Boucher insisted he did not want to sound "alarmist" about the new regime's impact -- but also warned that it could become harder for his bank to raise money, since investors could be reluctant to accept mortgage loans as collateral.
Any move to hike variable rates at Bank of Ireland could also ignite a new row with the Government.
The bank defied Taoiseach Enda Kenny and Tanaiste Eamon Gilmore last November when it faced down demands from the State to pass on eurozone rate cuts to its variable customers. It ultimately passed on between 0.1pc and 0.15pc of December's 0.25pc cut.
Mr Boucher said the State was a "stakeholder" in the bank and it was "important that we take this into consideration".
"We had a discussion with the Government on how we funded ourselves," he added.
"The Government has a vested interest in us making profits on a sensible basis."
Mortgages are seen as the major unknown for banks in 2012, as they get to grips with the new personal insolvency rules.
These rules will allow mortgage debt to be "written down" in some extreme circumstances and can shorten the current 12-year bankruptcy term to as little as three years.
Asked about mortgage rates last night, a spokeswoman for Bank of Ireland insisted there were no firm plans in relation to raising mortgage rates.
The bank boss "made general comments about pricing for risk only", she said.
Residential mortgage arrears are rising fast for Bank of Ireland, with 5.6pc of owner occupiers three months or more behind on their repayments. The Central Bank said last week that 9.2pc of all mortgages were more than 90 days overdue.
Repossessions by the bank almost quadrupled last year, rising from a low base of 18 to 75. But Mr Boucher predicted they would be higher still in 2012.
Mr Boucher claimed yesterday that "considerable speculation about potential public policy measures regarding mortgage arrears" had already triggered an increase in arrears at his bank in the second half of last year.
If the new rules were a "fundamental change" in the mortgage landscape, then the bank would have to "look at" its assumptions around mortgage risk.
"I wouldn't want to be alarmist about that," he stressed. "We do recognise that the existing arrangements aren't sustainable, that some change was needed."