Interest-only mortgages were one of the more lethal banking products developed during the boom and their full effect has yet to be felt. The Central Bank has pointed out that about half of the interest-only mortgages given to buy-to-let investors during the peak of the property market are due to revert to principal-and-interest repayment in the next 18 months.
The effect of this is hard to predict, but unlikely to be positive. Incomes have fallen or at best stayed static in the period, while taxes have risen. Rents have recently increased but are still off boom-time peaks and property values are still down more than 40 per cent or more from the peak. It is unlikely that these investors will be able to afford their repayments or sell their properties and clear the mortgages.
The banks will either have to restructure these loans or foreclose and take their losses. As was the case with residential mortgages, the scale of the problem – roughly €3.5 billion – is such that the losses involved are substantial and unappealing for the banks.
The impact could be compounded by the spillover from problem buy-to-let mortgages into their residential books, particularly in the case of people with second homes or who bought a single investment property as a pension.
If pushed by the banks to make repayments on your investment property, the rational response is to default on your homeloan and avail of the protections available under the residential mortgage arrears process.
Buy-to-let investors cannot expect much public sympathy and thus there will be less pressure on the banks to play nice than in the case of residential mortgages. But that said, 18 months brings us nicely to the general election.
It would seem like a good idea for the banks to start thinking now about the sort of solutions they will be offering buy-to-let investors and communicating with them. Hopefully we will not hear too much guff about moral hazard.