May the Force be with us all, as debt slaves strike back
As the Irish banks continue to hike their mortgage interest rates, a 'tipping point' looms for homeowners where their mortgages may move beyond affordability, writes Roisin Burke
Variable mortgage-holders might empathise with a scene from the original Star Wars film from the late 1970s.
Cornered by storm troopers in the dungeons of an imperial cruiser, Princess Leia, Luke Skywalker, Han Solo and Chewbacca jump down a chute, falling into a garbage compacter. Wading deep in foul rubbish, and after battling a swamp monster, suddenly they find the walls are closing in on them. "I've got a bad feeling about this," says Han, sounding a bit like David McWilliams before the property bubble burst.
Happily, Han and the gang escape the crushing walls, but will Irish homeowners?
The walls of negative equity, negative income, job loss and rising mortgage rates are closing in for many.
It could cost €3,000 more for many to make their mortgage repayments by the end of next year if rates rise as predicted.
Bank of Ireland's 58,000 homeowners will be hit with a hike from next Tuesday, the second this year. With an historic €2bn loss this year to combat, AIB has said it is likely to raise rates soon. Other lenders, such as Permanent TSB and EBS, have already announced increased rates.
The banks are losing money on mortgage lending, and are rushing to offset those losses on the backs of their mortgagees. Even those with trackers and attractive fixed rates will likely find themselves shifted to variable-rate mortgages when the term of their deals runs out.
Homeowners have had some stay of execution as the ECB has kept an historically low interest rate, but sooner rather than later that will have to end -- possibly by the end of next year.
Industry observers are speculating about a tipping point -- the point where interest rates rise so high that tens of thousands could be pushed beyond meeting their mortgages.
Frank Conway of the Irish Mortgage Corporation (IMC) reckons this point lies at around €250-€300 a month more for homeowners with newer variable mortgages of €250,000-€300,000.
"That co-relates with about 1.5 per cent more of a rise," he said. "That's the upper limit in consumer's minds. People who have bought in the post-tracker era of 2008 are most vulnerable."
Official figures show some 30,000 are in mortgage arrears, but in reality many more are struggling, unrecorded if they were in less than 30 days' arrears or have come to an arrangement with their bank.
This is not the worst of it. "Rates in general, not including an ECB rise, will be north of four per cent by the final quarter of 2011," Karl Dieter of Irish Mortgage Brokers predicts.
"Take someone on the average industrial wage (circa €38,000) with a €250,000 mortgage over 25 years. Before you even talk about mortgage rate rises you have income levies, pay cuts, personal loans. A seven per cent pay cut can put them at 65 per cent of disposable income.
"At this 65 per cent point, people start to default, they start to say 'I give up'," says Dieter. "A four per cent rate rise could bring them there. It's seriously something to worry about. Eventually people silently fall over the edge."
There's no direct link between the new cycle of rising interest rates that started with Permanent TSB's 2009 hike, but arrears have gone up from then onwards, Conway says.
There are some steps you might take to help keep your mortgage situation in check.
Stress-test your mortgage
Use a mortgage calculator such as the one on www.itsyourmoney.ie to stress-test what the latest interest-rate rises and future ones mean for your mortgage. Then at least you can see how much you might need to economise to prepare for it.
A hike of from 3.5 per cent to four per cent could mean €80 more a month on a €300,000 mortgage running 30 years.
A rise from 3.5 per cent to five per cent would see repayments increase by over €250 a month, or €3,000 a year.
Limit other debt
"We're hearing anecdotally there's a huge amount of unsecured credit contributing to mortgage repayment problems," says Conway. An IMC survey showed an increasing amount of people were having problems paying bills and loans.
Some report severe pressure and even door-stepping by some secondary debt-collectors. "Don't be swayed by more persistent collectors of other debt," Conway advises. "Your mortgage is a priority," he adds.
"The challenge for people now is to make hard decisions regarding credit-card and other debt. It's a question of who gets paid and how. Two car repayments could equal one mortgage."
Try to build up several months' worth of mortgage payments to insulate against a job cut/loss and interest-rate rises if you haven't done so already.
Mortgage repayment protection
Mortgage repayment protection covers mortgage repayments for a year if you lose your job through redundancy, accident or sickness. It's an option, but it's become an expensive product as job losses mount.
Anecdotal experience from subscribers is that it is difficult to get it to pay out in reality. It's vital to check small print -- it won't pay out if you opt for voluntary redundancy, for instance.
It costs as much as around €70 a month on a €1,200-a-month mortgage, but the cost can rise after you purchase it.
You may already have accident or illness cover through work or other insurance -- it's worth checking that option first.
"Those who don't have it have probably left it too late to go with this," says Conway. "You may not be able to get it but if you can it should be looked at -- if you can afford it."
To fix or not to fix?
Fixed-rate mortgage offerings that limit or fix your mortgage within a certain margin of the ECB rate are becoming ever more expensive, going up to five per cent. "The question for people is can you afford it," says Conway. "It's a betting game."
"They're probably only an option for the most conservative of borrowers," says Dieter.
If you have a tracker or a well-priced fix, it goes without saying that you should hold on to it for dear life.
If you're struggling financially, you may want to look at trying to renegotiate your mortgage with your lender. There's a Catch-22 here, in that you need to be in arrears first, to leverage a new deal in most cases.
"The lender will be looking for evidence of arrears first and will be slow to negotiate with you without them," says Conway. "Do up an outline of your income and expenditure and present your case."
Some off-kilter advice from one mortgage adviser who didn't wish to go on record: "You need to show arrears to your lender in order to renegotiate your mortgage. However, you want to avoid damaging your credit record with the Irish Credit Bureau (ICB), which could happen if you show more than 30 days arrears. One way to do this is to cancel your mortgage direct debit, but pay your mortgage by cheque. It sends a signal to your lender but it keeps your credit rating intact in the short term."
Moving on to interest-only repayments for a spell is generally cautioned against, but could be appropriate in some cases. "Interest-only is a better option than none at all for some people," said Conway.
Nama for ORDINARY
Is there any relief in sight? Both Conway and Dieter favour State intervention of some kind.
"Never mind moral hazard, there's the hazard of putting investors off property for decades," Dieter argues.
Whatever happens, it's time to plan ahead to take more mortgage pain.
"One thing's for sure -- we're all going to be a lot thinner," Han Solo said when it looked like he and his mates were all going to get squished in the garbage compacter.
The famous Haughey "tighten our belts" speech dates from around that same era. The difference now is the colossal price people paid for mortgages and the level of personal debt they're carrying, making a tip into mortgage default as rates rise much more likely.