Sunday Business Post: Opinion piece by on Mortgages

The article is available on the SBPost website here or in full below.

Every section of the market faces problems in 2011: investors , existing borrowers and potential first time buyers.  People who have not yet bought face removal of tax relief at source (TRS) under the new Programme for Government, to give greater tax relief to people who bought during the boom. This policy makes a presumption of financial duress for the 160,000 first-time buyers who drew down loans from 2004 to 2008.

However, the number of mortgages with arrears or restructures is just over half of that amount, so it will be a sop to people who are not in trouble but might soon be, due to increasing rates. Of the €110 billion in residential mortgages outstanding, there is about €65 billion on trackers, representing 400,000 households. Until now, they have avoided the painful rate hikes imposed on standard variable rate (SVR) mortgage holders.

Over the last 24 months, while the ECB base rate remained at 1 per cent, variable rates doubled. Now every person with a non-fixed rate mortgage is going to feel it. A 0.25 per cent increase in the base rate means existing borrowers will see monthly payments go up by about €15 per €100,000 borrowed over 25 years.  Average draw-down for first-time buyers peaked long after the market had. In the first quarter of 2008 it hit €251,000. A person who took this loan on a standard tracker (ECB+1.1 per cent) is now paying €1,076 per month, less €80 TRS, giving a net cost of €996.

With the new proposal, their TRS will rise to €119, giving a net cost of €957.  Contrast that with a person who draws down in July with the 2011 average draw-down of €188,000.They are stuck on a high margin standard variable (we’ll assume a soon-to-look-cheap 4.3 per cent) and they’ll be paying €1,023. This rate is also subject to change from the lender, irrespective of ECB movements.

If we get a series of rate hikes we may see the divergence between the two groups grow to over €150 per month, which is €1,800 per annum of after-tax money, while the boom buyers on cheaper mortgages enjoy greater relief. To talk about fairness and at the same time reward one group at the expense of another is inherently contradictory.

There is already a road map setting out the demise of TRS, unveiled in last year’s budget. TRS in its present form would end, starting in 2012.  A reduced amount would apply through 2013, ending entirely at the end of the year.

Thus far, the cheap-to-implement ‘kicking the can down the road’ solution has proved effective at avoiding repossessions (there were fewer than 400 last year, while 200 times that number are distressed), but that masks a problem in the making; namely, where does it end?

The loans are not ‘self curing’ or coming back out of arrears; rather they are going deeper underwater, which spells more pain for people in the future as arrears mount and prices fall.
2011 is a year in which we will be paying more tax, in part to fund the banking bailout, but more to fund the structural deficit which exists because as a nation we spend more than we earn.

The continuing focus on debt/GDP is perhaps mistaken; debt/revenue needs closer attention. Gross GDP doesn’t take account of expenses – in the same way that a person making €50,000 a month might seem very well off, but not if their bills and loans cost €100,000 a month. What is left over (revenue) is the vital metric.

It is that idea of ‘what is left’ that points towards a vital tipping point for borrowers. A typical buyer with a loan of €250,000 on the average industrial wage of €36,375 is now taking home €2,383 per month; his loan (being a 1.1 per cent tracker or 5.2 per cent SVR) ranges from €1,102 to €1,490 per month.

Research in other countries has shown that once you go beyond 65 per cent of your disposable income on debt service you fall over: it’s almost mechanical in nature. That 65 per cent mark for a person on the average wage is €1,550, so as little as €60 per month, or about one more 0.25 per cent rate hike, stands between survival and going under for many households.

Evidence in Britain shows that income shocks (wage cuts or higher taxes) are only half of the story; expenditures shocks (medical bills, unforeseen expenses) are the other, and they are commonplace.

Investors are also reeling. Rents are stabilising (sadly for renters, rent allowance was recently scrapped) and they have dropped to where yields are starting to move towards the healthier 5 per cent-plus region. But for boom buyers, lower rents now often mean returns below 2 per cent.

The supply held by Nama, and when or how it will be placed on the market, is unknown. The absence of clear information regarding that agency has put the entire industry in stasis.
A dearth of tax changes means that, unlike in other businesses, you can offset only 75 per cent of your interest expense.
While disallowing expenses versus income is contrary to general accounting principles, this holds no sway with Irish policymakers. It was effectively a way to make a tax grab. The flat tax on non-principal residences was similar in nature. It doesn’t discern between a castle and a cottage. Nor can you set it off against income, which is madness. This year the Private Residential Tenancies Board also increased its charges by about 30 per cent. This is a mandatory service which is also a monopoly with no substitutes.

The best general solution, the most meaningful and sincere answer to all of this, is to target assistance at those who need it, and to take the Law Reform Commission paper on personal debt and debt enforcement and turn it into law. This paper is a fully thought out piece of legislation that just needs statutory backing. The national policy response should require concentration on particulars, not populism.

Karl Deeter is operations manager at Irish Mortgage Brokers and head of customer advice at, a firm of accountants and financial advisers

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