Boom-time mortgages risk worsening Irish debt crisis -central bank

DUBLIN, July 16 Wed Jul 16, 2014 12:01pm EDT

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DUBLIN, July 16 (Reuters) - Almost half the interest-only mortgages taken out at the height of Ireland's property boom are due to revert to full repayment in the next two years, which could push up mortgage arrears, the central bank said on Wednesday.

Ireland's mortgage crisis is one of the main risks to its recovery, with almost one in five home loans, worth 24 billion euros ($32 billion), in distress following a property crash that pushed Ireland into an EU/IMF bailout it completed last year.

While the vast majority of mortgages in Ireland are approved on an amortizing basis, interest-only arrangements account for 8 percent of all mortgages by value. A large share were originated between 2005 and 2008 as the market was about to collapse.

The Central Bank said holders of these mortgages, mainly issued in the riskier buy-to-let segment, were particularly vulnerable to falling behind on their debts. Some 43 percent of them are due to revert to principal-and-interest repayment over the next two years.

"The scale of mortgage arrears remains a significant threat to the Irish economic recovery," the central bank said.

"A number of the features (of original interest-only mortgages) suggest they could become problematic and deserve special attention."

Although the number of home loans in arrears for more than 90 days fell for the second successive quarter in the three months to end-March, the number in arrears for more than 720 days continues to rise sharply. More than one in four Irish home loans has been in distress for at least two years.

Buy-to-let arrears, which account for a further 11 billion euros of mortgage debt, have also continued to rise.

The central bank's estimates showed that the median monthly installment for borrowers that took out interest-only mortgages before the crash will increase more than fourfold with the switch to a repayment footing, from 397 euros to 1715 euros.

Current average rents, although on the rise in Dublin, are too low to bridge the gap and the problem may be further exasperated by the fact that 44 percent of all borrowers will be beyond retirement age when their increased repayments kick in.

One mitigating factor is that house price appreciation may take hold before this happens, the central bank said. It estimated that average annual increases of 3.2 percent would be needed over a 13-year horizon to help a borrower with an average age of 52.

Irish house prices rose by 10.6 percent in the year to end-May, driven by a 22 percent surge in Dublin where supply is scarce. But prices remain 45 percent off their peaks.

Given the prevalence of mortgages that track the European Central Bank's record low rates among interest-only borrowers, the numbers struggling with an already reduced repayment burden is concerning, the central bank said. ($1 = 0.7389 Euros) (Reporting by Padraic Halpin; Editing by Catherine Evans)

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