Tuesday 17 September 2019

Mortgage brokers call for ban on interest-only loans

Charlie Weston Personal Finance Editor

THERE have been calls for a ban on interest-only mortgages after it emerged that as many as 10,000 homeowners have this type of home loan.

Many of these mortgage contracts were for the purchase of expensive houses by lawyers, accountants and architects, the Irish Brokers Association (IBA) said.

Those on interest-only mortgages face significant increases in monthly repayments in the next 12 months, it warned.

With an interest-only mortgage, the monthly repayment pays only the interest on the loan and not any of the capital or loan balance.

The original amount borrowed stays the same for the term of the mortgage.

Ciaran Phelan of the IBA said the majority of those who entered interest-only contracts for the life of the mortgage have jumbo €1m-plus loans.

The value of their homes has crashed by 50pc, which means they are €500,000 or more in negative equity.

Many of these jumbo mortgages were taken out by professionals who had substantial fee-based income at the height of the boom.

The professionals include solicitors, accountants and property developers but most of these have now seen their incomes cut by up to 75pc over the past two years.

"Until now the low interest rates have camouflaged this problem -- protecting mortgage holders in the short term," Mr Phelan said. Most of the jumbo mortgages are on tracker rates or have a price promise attached to them which means the interest will rise when the European Central Bank rate rises.

However, interest rates are now on the up. A rise of 1pc in the ECB rate would add €1,000 a month to the repayments on a €1.2m mortgage.

"Lenders granted these mortgages on an open-ended, interest-only basis and without seeking evidence of how the capital would ultimately be repaid," Mr Phelan added.

He said most of those with jumbo mortgages appear to have assumed the property market would continue to grow and that they could down-size using the growing equity once the kids were raised.

"That option now seems increasingly unlikely.


Taking a €1.2m mortgage on a property now worth €700,000, it would take 11 years at a strong average growth rate of 5pc to eliminate the negative equity, never mind create any equity for the homeowner." The IBA has called for a ban on the issuing of interest-only mortgages.

"This repayment option is no longer tenable on this environment," Mr Phelan said.

Irish Independent

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