Brendan Burgess
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Here is an article I had in the Sunday Business Post on 20 July
At this stage, exactly what is a sustainable mortgage?
The very first recommendation in the Oireachtas Finance Committee’s recent report on mortgage arrears called on the Central Bank to issue a definition of a sustainable mortgage from the borrower’s point of view.
The Central Bank does have a definition of a “sustainable solution”, but this is a prudential definition from the lender’s point of view. Up until recently, this definition said that for a mortgage to be sustainable, it must be paid off in full by age 70. There were many cases of 50-year-old couples with €60,000 remaining on their mortgage who could well afford the interest of €250 a month, but who could not make any capital repayments. The Central Bank was classifying these mortgages as unsustainable, which caused huge stress and worry for these borrowers.
After a suggestion from the chairman of the Oireachtas Finance Committee, Ciarán Lynch, the Central Bank has amended its guidelines so that lenders can, in exceptional circumstances, allow a borrower to continue to pay their mortgage into retirement.
But the Central Bank has still not issued any guidelines as to what a sustainable mortgage is from the borrower’s perspective. Where a mortgage is genuinely unsustainable, it is in the interests of the lender and the borrower to face up to this as soon as possible so that they address it. Objective guidelines from the Central Bank would help borrowers to face reality.
Where a lender is classifying a perfectly sustainable mortgage as unsustainable, clear guidelines from the Central Bank would strengthen the borrower’s hand in negotiations with the lender. If the case went to court, the Central Bank guidelines would be very useful in guiding the judge whether or not to grant an order for repossession.
So how might the Central Bank define a sustainable mortgage?
Most people simply assume that a borrower must be able to make their full capital and interest repayments over the term of their mortgage for it to be sustainable. If they can’t make their full capital and interest payments, they assume that the mortgage is not sustainable. I want to challenge this definition which has arisen from custom and practice and which has no theoretical basis.
I would propose an alternative definition which surprises most people when they hear it first - while a borrower is able to pay the interest on their mortgage, that mortgage is sustainable for the borrower. The cost of ownership of a home is the interest paid on the loan. If they can afford the cost of ownership, their mortgage should be considered sustainable. While they are paying the interest in full, the balance on their mortgage account is not increasing. If they are unable to pay the interest on their mortgage, the balance owing on the mortgage is increasing, and so their mortgage is unsustainable.
Compare the situation of a mortgage holder with someone who chooses to rent their home. The cost of accommodation for a renter is the rent. While they can afford the rent, their accommodation is sustainable. When they can’t afford the rent, their accommodation is unsustainable. We don’t require a person who rents their home to build up a separate savings fund so that they can buy a home outright on retirement.
Likewise, we should not insist that a borrower own their home mortgage-free on retirement to be sustainable. According to our proposed definition, if a retired borrower is able to pay the interest, then the mortgage will be sustainable. If they can’t afford to pay the interest because their income has been reduced, the mortgage will be unsustainable. But it’s better to have a voluntary sale at 65 than at 50.
There can be many favourable developments between the ages of 50 and 65. Inflation may increase the level of pensions. The borrower’s housing needs may change and trading down to a smaller property may suit the borrower. They may get an inheritance or lump-sum on retirement with which they can pay off the mortgage. But it makes no sense to classify a mortgage as unsustainable at 50, because of something which is expected to happen 15 years later.
Of course, for a mortgage to be sustainable, it must be sustainable for the lender as well. Where a borrower is able to pay the standard variable rate of interest on a mortgage, it is sustainable and profitable for the lender. Swiss banks recognise this. They lend up to 65 per cent of the value of the home to new borrowers on an indefinite, interest-only basis. The borrower simply pays the interest. They do not have to repay any capital until they sell their home.
While paying only the interest on a cheap tracker mortgage may well be sustainable for the borrower, it is not sustainable for the lender.
In effect, the lender would be extending a loss making loan indefinitely. Rather than classifying the loan as unsustainable and forcing a voluntary sale, some other solution needs to be reached which balances the needs of both sides. For example, the interest rate could be increased by 1 per cent and switched to interest only.
It is extraordinary that, after six years of the mortgage crisis, we have had so little discussion of what constitutes a sustainable mortgage. The Central Bank should kick off this discussion immediately.
Brendan Burgess is the founder of the discussion forum askabout money.com, and was a member of the government’s expert group on mortgage arrears
At this stage, exactly what is a sustainable mortgage?
The very first recommendation in the Oireachtas Finance Committee’s recent report on mortgage arrears called on the Central Bank to issue a definition of a sustainable mortgage from the borrower’s point of view.
The Central Bank does have a definition of a “sustainable solution”, but this is a prudential definition from the lender’s point of view. Up until recently, this definition said that for a mortgage to be sustainable, it must be paid off in full by age 70. There were many cases of 50-year-old couples with €60,000 remaining on their mortgage who could well afford the interest of €250 a month, but who could not make any capital repayments. The Central Bank was classifying these mortgages as unsustainable, which caused huge stress and worry for these borrowers.
After a suggestion from the chairman of the Oireachtas Finance Committee, Ciarán Lynch, the Central Bank has amended its guidelines so that lenders can, in exceptional circumstances, allow a borrower to continue to pay their mortgage into retirement.
But the Central Bank has still not issued any guidelines as to what a sustainable mortgage is from the borrower’s perspective. Where a mortgage is genuinely unsustainable, it is in the interests of the lender and the borrower to face up to this as soon as possible so that they address it. Objective guidelines from the Central Bank would help borrowers to face reality.
Where a lender is classifying a perfectly sustainable mortgage as unsustainable, clear guidelines from the Central Bank would strengthen the borrower’s hand in negotiations with the lender. If the case went to court, the Central Bank guidelines would be very useful in guiding the judge whether or not to grant an order for repossession.
So how might the Central Bank define a sustainable mortgage?
Most people simply assume that a borrower must be able to make their full capital and interest repayments over the term of their mortgage for it to be sustainable. If they can’t make their full capital and interest payments, they assume that the mortgage is not sustainable. I want to challenge this definition which has arisen from custom and practice and which has no theoretical basis.
I would propose an alternative definition which surprises most people when they hear it first - while a borrower is able to pay the interest on their mortgage, that mortgage is sustainable for the borrower. The cost of ownership of a home is the interest paid on the loan. If they can afford the cost of ownership, their mortgage should be considered sustainable. While they are paying the interest in full, the balance on their mortgage account is not increasing. If they are unable to pay the interest on their mortgage, the balance owing on the mortgage is increasing, and so their mortgage is unsustainable.
Compare the situation of a mortgage holder with someone who chooses to rent their home. The cost of accommodation for a renter is the rent. While they can afford the rent, their accommodation is sustainable. When they can’t afford the rent, their accommodation is unsustainable. We don’t require a person who rents their home to build up a separate savings fund so that they can buy a home outright on retirement.
Likewise, we should not insist that a borrower own their home mortgage-free on retirement to be sustainable. According to our proposed definition, if a retired borrower is able to pay the interest, then the mortgage will be sustainable. If they can’t afford to pay the interest because their income has been reduced, the mortgage will be unsustainable. But it’s better to have a voluntary sale at 65 than at 50.
There can be many favourable developments between the ages of 50 and 65. Inflation may increase the level of pensions. The borrower’s housing needs may change and trading down to a smaller property may suit the borrower. They may get an inheritance or lump-sum on retirement with which they can pay off the mortgage. But it makes no sense to classify a mortgage as unsustainable at 50, because of something which is expected to happen 15 years later.
Of course, for a mortgage to be sustainable, it must be sustainable for the lender as well. Where a borrower is able to pay the standard variable rate of interest on a mortgage, it is sustainable and profitable for the lender. Swiss banks recognise this. They lend up to 65 per cent of the value of the home to new borrowers on an indefinite, interest-only basis. The borrower simply pays the interest. They do not have to repay any capital until they sell their home.
While paying only the interest on a cheap tracker mortgage may well be sustainable for the borrower, it is not sustainable for the lender.
In effect, the lender would be extending a loss making loan indefinitely. Rather than classifying the loan as unsustainable and forcing a voluntary sale, some other solution needs to be reached which balances the needs of both sides. For example, the interest rate could be increased by 1 per cent and switched to interest only.
It is extraordinary that, after six years of the mortgage crisis, we have had so little discussion of what constitutes a sustainable mortgage. The Central Bank should kick off this discussion immediately.
Brendan Burgess is the founder of the discussion forum askabout money.com, and was a member of the government’s expert group on mortgage arrears
