Saturday, August 20, 2011

Mortgage Repayments

Irish households are making capital repayments of around €5 billion per annum on their stock of mortgage debt.

The first release of the Financial Regulator’s Residential Mortgage Arrears and Repossession Statistics shows that in September 2009 there was €118.6 billion of outstanding balances on all owner-occupied mortgages in Ireland.  The most recent release gives data for March 2011 and shows that there was €116.0 billion on the outstanding balances. 

Over the 18-month period in question the total balance had decreased by nearly €3 billion.  However, this does not give the full capital reduction on the mortgages that were outstanding in September 2009 as new lending issued since them would be included in the March 2011 figure from the Financial Regulator.

Although not perfect, we can use the Irish Banking Federation’s Mortgage Market Profile data to gauge new lending in the mortgage market.  This data is estimated to represent 95% of the mortgage market and provides details of new lending in five categories

  • First-time buyer
  • Mover-purchaser
  • Residential investment
  • Re-mortgage
  • Top-up

For our purposes here we can ignore residential investment mortgages as the mortgage arrears data only includes owner-occupied mortgages.  There are two categories that are definitely new lending: first-time buyers and mortgage top-ups.

In the 18 months between September 2009 and March 2011, there was €3 billion of mortgages issued to first-time buyers and €0.8 billion of top-ups provided to existing borrowers.  There will have been some capital repayments on this €3.8 billion but for simplicity we will assume it to be small.

The treatment of the lending to the other two categories is less clear-cut.  Re-mortgages are borrowing to repay existing loans (switching product or lender).  We will assume that the €0.7 billion of re-mortgage lending was equal to the value of the existing mortgages.  This would mean that no new lending was issued.

For mover-purchases the outcome is even more uncertain.  The purchaser may or may not have had a mortgage on the original property.  If there was no mortgage then the lending will have been new lending.  If they have an existing mortgage, then the new mortgage may be more or may be less less than the mortgage on the original residence. 

Although there is no indication to believe it is true we will assume that the €2.3 billion issued to mover purchasers matches the loans they had on their existing property.  Again this would mean that no new lending was issued.

It is probable that both of these assumptions are conservative.

Once we account for the €2.8 billion reduction in the overall outstanding amount and the €3.8 billion of new lending for first-time buyers and top-ups then the €118.6 billion owed in September 2009 was actually reduced by around €6.5 billion over the next 18 months. 

Some of this capital reduction may be due to loan write-downs but the vast majority will be due to repayments.  There are substantial mortgage arrears problems in Ireland, but it must also be remembered that substantial mortgage payments are also being made.  The Financial Regulator’s data show that nearly 90% of mortgages are neither in arrears or restructured.

Over the 18-month period in question here, the household sector had a gross savings rate of around 10% and had about €15 billion in gross savings.  As we have said before most of that is going to pay down debt rather than increase deposits.  And as shown here a lot of that debt repayment is going to pay down mortgages.  I would guess that around €5 billion of mortgage capital repayments are being made per annum.

Looking briefly at the number of mortgages.  In September 2009 there were 794,609 mortgages outstanding.  By March 2011 this had fallen by more than 12,000 to 782,429. 

Mortgages to first time buyers are definitely an increase in the number of mortgages.  We will take it that there is no increase in the number of mortgages as a result of mover purchasers. Remortgages and top-ups do not change the number of mortgages.  There were nearly 15,500 mortgages given to first-time buyers between the two dates in questions.

An arrears rate of 6.3% (which is only going to increase in the medium term) is signal enough that there are significant problems in the mortgage market.  Any proposed solution should be targeted at this problem as the majority of people are still meeting their mortgage obligations.

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