Key Post Understanding what "arrears" actually means

[Brendan Burgess]

Let's start with an example

|Mary|John|Pat
Balance at start of year|€100,000|€100,000|€100,000
Interest rate|4%|4%|4%
Term|30 years|20 years|10 years
Monthly interest|€333|€333|€333
Repayment due|€477|€606|€1,012
Repayment made|€477|€477|€677
Mortgage balance at year end|€98,240|€98,240|€95,840
Arrears balance at year end| nil|€1,542|€4,020

Mary and John

• have borrowed the same amount
• have the same interest rate
• have made the same repayments

But John is in arrears, while Mary is not

Pat has paid more than John.
He owes less than him at the end of the year.
Yet, his arrears are higher.


Mortgage repayments have an interest and a capital element in them.

At an interest rate of 4%, when the remaining term is 17 years, around half the monthly repayment is capital.
With 10 years left, 2/3rds of the repayment is capital.


The running cost or current cost of your mortgage is the interest you are paying on it
The capital element of your mortgage is a form of saving


If a borrower is unable to pay the interest on their mortgage, then they are in trouble.
The interest on a mortgage is similar to the rent on a house. If a tenant can't pay their rent, they are living beyond their means.
If a borrower can't pay the interest on their mortgage, they are living beyond their means.

If a tenant can pay their rent, but is not saving every month, no one describes it as a crisis. It is a good idea to save every month, but the vast majority of people don't do so at present.

If a borrower can pay the interest on their mortgage in full, and can even pay a bit of the capital, they are, in effect, saving. They are reducing the balance outstanding on their mortgage.

 

[Brendan Burgess]

Here is a headline from the Cork Examiner after the most recent arrears statistics were published.

65,000 home loans not paid in 6 months


This headline was quoted as the first item in "What it says in the papers" programme on RTE's Morning Ireland.

6 months arrears does not mean that the borrower has made no payment in 6 months

It means that the arrears balance is the equivalent of 6 months' repayments.

So if a borrower has paid half the payment due every month for 12 months, they will owe the equivalent of 6 months repayments.

Say a borrower fell into 6 months' arrears 12 months ago. They recovered and are now paying the monthly repayment in full, but have not been able to clear the accumulated arrears. They are included in the 6 months arrears figtures.

|David|John
Balance at start of year|€100,000|€100,000|€100,000
Interest rate|4%|4%|4%
Term|20 years|20 years|10 years
Monthly interest|€333|€333|€333
Repayment due| nil |€606|€1,012
Repayment made|nil |€477|€677
Mortgage balance at year end|€104,000|€98,240|€95,840
Arrears balance at year end| nil|€1,542|€4020

David has been given a one year payment moratorium. He makes no payments, but as this is what he has agreed with the bank, he does not figure in the arrears figures.

John owes €5,800 less, but he is in arrears.

I would be much more concerned about David than I would be about John.

The best measure of the mortgage payment problems would be the number of people whose balance today is greater than it was 12 months ago.

 

[RichInSpirit]

Arrears is a mythical figure that hardly anyone understands.
Technically you could have arrears of €100,000 and have only €1000 left to pay on a loan.
When you pay the final €1000 your arrears would be zero.

 

[Brendan Burgess]

Arrears is a mythical figure that hardly anyone understands.
Technically you could have arrears of €100,000 and have only €1000 left to pay on a loan.
When you pay the final €1000 your arrears would be zero.

Richie

I am with you in spirit on this one. It is a memo figure, and hardly anyone understands it.

I thought that I understood it, until I saw this bit about having €100,000 arrears on a €1000 loan.

I did have one case 10 years ago with Irish Nationwide where the arrears balance was well in excess of the outstanding balance but that was because Irish Nationwide were calculating it wrong. They denied that they were by the way, but they were.

Can you give an example for the ordinary calculation of arrears how that might happen? If it's an excel spreadsheet, email it to me at brendan at this website.

If you have a statement from a bank showing an arrears figure in excess of the balance outstanding, I would love to get a copy of it.

.

Brendan

 

[Brendan Burgess]

See attached

Mortgage Arrears Statistics: What can they really tell us?
Seamus Coffey
Dublin Economics Workshop
October 2013

Slide 9 onwards, Getting into Arrears is a great illustration of how meaningless the figures are

Brendan

 

[RichInSpirit]

Richie

I am with you in spirit on this one. It is a memo figure, and hardly anyone understands it.

I thought that I understood it, until I saw this bit about having €100,000 arrears on a €1000 loan.

I did have one case 10 years ago with Irish Nationwide where the arrears balance was well in excess of the outstanding balance but that was because Irish Nationwide were calculating it wrong. They denied that they were by the way, but they were.

Can you give an example for the ordinary calculation of arrears how that might happen? If it's an excel spreadsheet, email it to me at brendan at this website.

If you have a statement from a bank showing an arrears figure in excess of the balance outstanding, I would love to get a copy of it.

.

Brendan

Hi Brendan, I was wrong about that. I discovered that when your arrears hits the same amount as your outstanding loan it just equals the loan.

 

[44brendan]

Just read this post Rich and was preparing my riposte when I came across your own!! As you say the arrears figure will never exceed the balance outstanding. However what would concern me is the fact that when the bank approves a revised repayment schedule (ARA), it is standard practice to capitalize historical arrears. This means that all historic arrears are wiped clean and the loan is showing nil arrears. This happens even in cases where clients are paying interest only. On that basis the published arrears figures would relate only to cases where either the borrowers are not co-operating or where an alternative schedule has broken down. This does not mean that those on an ARA are not in trouble!! many are on a schedule that does not meet the sustainability test and will encounter problems when re-negotiating a schedule with the bank upon expiry of their existing agreement.