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Interest-only loans a ticking timebomb

Wednesday, July 16 12:54:18

With the high number of interest-only loans taken out during the boom years poised to shift to interest and capital, there's the potential for mortgage arrears time bomb, research from the Central Bank reveals today.

The research analyses the loan characteristics, including loan performance, of mortgages originated on interest-only terms in Ireland.

It found that, while interest-only arrangements have been widely used as a means of temporary forbearance to deal with the current mortgage arrears crisis, mortgages were also originated on interest-only terms during the height of the boom.

Between 2005 and 2008, interest-only mortgages were mainly issued to buy-to-let investors on tracker mortgages and at high loan-to-value ratios.

Interest-only mortgages were more likely to be issued to buy-to-let borrowers in Dublin and for the purchase of apartments than standard mortgages. The arrears rates on these mortgages are higher than standard mortgages, the research paper said.

A significant number of interest-only mortgages are due to revert to principal-and-interest repayments in the next 2 years. The resulting higher repayments for these borrowers could lead to an increase in mortgage arrears, it warns.

It also found that 44pc of the buy-to-let interest only borrowers will be beyond retirement age when their loans are due to start principal-and-interest repayments.

However there are 14 years on average until these borrowers retire, allowing them substantial time to establish strategies to cope with the additional repayments.

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