Interest Rates on PDH Mortgages

The interest rate charged on mortgages in Ireland has been getting a considerable airing recently, particularly the rate charge on loans on what is called the ‘Standard Variable Rate’.  The following data from the Central Bank’s Money, Credit and Banking data shows the amount of PDH mortgages by the three main rate types:

• Standard Variable Rate
• Tracker Rate
• Fixed Rate

The total amount of loans at the end of 2014 was €90.6 billion.  The separate mortgage arrears data from the Central Bank show that there was €104.9 billion of PDH mortgages in Q4 2014.  The reason for the difference is coverage with the Credit, Money and Banking data only covering loans from banks currently trading in Ireland thus mortgages from Bank of Scotland (Ireland), INBS and other defunct entities are excluded.  Still the above graph covers 86 per cent of PDH mortgages.

Over the four years for which the data is available (Q4 2010 to Q4 2014) the amount of tracker mortgages has fallen by €10 billion and now stands at €42.8 billion.  If we apply the current rate of amortisation in a linear fashion is means it will take another 16 years for the banks to clear the tracker mortgages from their books.

The amount of SVR loans has generally increased over the period and is now €41.6 billion.

The amount of accounts with a fixed rate fell (as interest rates declined) in 2011 and 2012 but has recently started rising again – perhaps as those on SVRs switch to avail of lower fixed rates.   In the chart fixed rate only refers to those fixed for more than one year.  Loans which are fixed for up to one year are included in the SVR total as these essentially face the same conditions. 

There was €2 billion of PDH mortgages fixed for up to one year (which itself was an increase of €0.5 billion over the year) and €6.1 billion of PDH mortgages fixed for more than one year (also showing an increase of €0.5 billion over the year).

What the aggregate data cannot show is the distribution of loan sizes.  It is commonly stated that there are 300,000 households with SVR mortgages.  This is half of the 600,000 households who have a mortgage.  The average mortgage across all households with a mortgage is around €175,000 but there are lots of underlying factors that the average ignores.

If the average age of SVR loans is older than that of Trackers we could expect a greater proportion of small loans in the SVR category.  This is because older loans will have been taken out when house prices were lower and the borrower will have had longer to repay the capital.  Some insight into these characteristics would be useful.

The average rates for new business and outstanding amounts are shown in the following table from the Central Bank.

Across all categories the “interest rates on outstanding loans for house purchase were broadly unchanged at 2.71 per cent at end-March 2015.”

If €41.6 billion of SVR mortgage holders face an interest rate that is one percentage point higher than would be charged in ‘normal’ times then the extra interest they are paying each year is around €400 million.  If there are 300,000 households with an SVR mortgage that is average of €1,300 per household per year.

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Presentation to DCC on arrears and repossessions

Last night Dublin City Council were provided with a presentation on some aspects of the home loan schemes run by the council.  There is a lot of interesting material in the presentation and we will focus on just some aspects of it.

Dublin City Council have a loan book with 2,588 accounts (it is one account per household) with a total amount outstanding at the end of 2014 of €309 million, giving an average of just under €120,000 per household.

Of these accounts, 1,192 or 46 per cent were in arrears and these represent €157 million or 51 per cent of accounts by value.  The average balance of the accounts in arrears is €131,000 and the average amount of arrears is €12,677.  Just over half (605) of the 1,192 accounts are in arrears of more than 12 months and these represent for 89 per cent of the arrears amount.

More interesting perhaps are some of the outcomes in relation to sustainability and repossessions.  The presentation states:

At the end of 2014, a total of 251 accounts are categorised as unsustainable with 154 being assessed for mortgage to rent and the balance of 97 being assessed for possession (there are 25 properties due for repossession in 2015, 12 of which are abandoned).

In terms of DCC repossessions, to date there have been 16 cases of voluntary surrender and 93 District Court repossessions (a total of 109 properties have therefore been taken into DCC’s possession). The vast majority of these (n=100) relate to shared ownership including ‘affordable’ shared ownership. Repossessed properties are located across the city, with the majority in Dublin 10 and Dublin 11.

To date, only TWO households entered homeless services as a result of possession. Both departed to PRS.

DCC try to modify loans (mainly using interest-only periods) to reduce the payments for those who engage with them and complete a standard financial statement.  According to the report “the majority of borrowers [in arrears] are working” but around one-quarter are unemployed.

In such cases it may not be possible to make the loan affordable though it is not clear what metric was used to adjudge the 251 accounts as “unsustainable” though a bar of 30 per cent of net income for the payment required under the terms of the loan is used later in the presentation. 

DCC have 90 borrowers who are not paying and not engaging.  These non-payers and non-engagers correspond to 3.5 per cent of borrowers from DCC.

Of the 251 accounts judged to be “unsustainable” the loan agreement will be ended and the property repossessed 97 (nearly 40 per cent) of cases.   The remainder are being assessed for a mortgage to rent scheme.

DCC have already repossessed 109 properties with 85 per cent of these having taken place on foot of a court order.  It is not stated what happened in these 109 cases and whether the household, if any, continue to live in the property under a tenancy agreement.

The presentation highlights that two household contacted DCC’s homeless services following the repossession.  It is not clear why the number was highlighted with the use of capitals.  It could be to highlight that repossessions can result in homelessness though the report does say that both households “departed to the PRS” (presumably private rental sector).  It could also be to highlight that repossession leads to a possibility of homelessness in very few cases – the 109 repossession resulted in ‘just’ two households contacting DCC’s homeless services.

The presentation also indicates that of the 25 properties due for repossession in 2015 that 12 have been abandoned.  In these cases the repossessions will lead to an increase in the supply of housing available and 98FM report that “Houses that have been taken back by the council are given to people who're waiting on the council's social housing list.”

While there can be a threat of homelessness for those who face repossessions it will also be case that repossessions can increase the supply of housing market by bringing back in to use houses that are otherwise vacant and abandoned.

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Repossession Statistics Distilled

A piece in yesterday’s The Irish Times opens with the following:

The rate at which homes are being repossessed has increased by more than 500 per cent since last year, according to figures from the Courts Service.

Some 586 repossession orders were granted by the circuit court in the first three months of this year, compared with 95 in the same period last year. Of the 586, some 383 were for primary homes, 97 were for buy-to-lets and 106 were “unknown”.

Somewhat confusingly the opening sentence is disputed later in the piece:

A spokesman for the Courts Service said it was important to note that the making of a court order for possession did not necessarily mean that the applicant had obtained possession of the property affected.

“It is a matter for the person or company who obtained the order for possession to pursue its execution. The Courts Service does not have statistics on the number of actual repossessions.”

It is true that the Circuit Courts (mainly through County Registrars) made 586 possession orders in Q1 2015.  However, the 106 that are in the “other/unknown” category refer to commercial property and other assets over which ownership disputes arise.  These should not be included in any analysis of possession orders for residential properties.

Thus in Q1 2015 there were 480 possession orders granted for residential properties (383 primary dwellings houses, PDHs, and 97 buy-to-lets, BTLs).  This compares to 72 possession orders granted for residential properties in the first quarter of 2014.  How this 72 were split between PDHs and BTLs is not available as the Courts Service data did not break down the data by PDH and BTL until the final quarter of 2014.  In Q1 2015 there was an annual increase of 430 per cent in the number possession orders for residential property granted by the Circuit Courts. 

The 383 possession orders for PDHs represents around 1.3 per cent of the 30,000 households with arrears of more than two years on their mortgage accounts at the end of 2014.  If all of these cases were to result in a possession order being granted it would take another 20 years for all those in arrears of more than two years to have a possession order granted against them.

It should also be noted that there wasn’t a large step-change increase in the number of orders being granted in Q1 2015.  The increase has been seen in the data from the second quarter of 2014, with increases in every quarter since.

Of course, the Central Bank produce similar data, and some timing differences (when they are reported by the banks) and coverage differences (all courts rather than just the Circuit Court) aside, they tell a very similar story.  A analysis of the Central Bank data on proceedings and repossessions back to 2009 is here.  Here is a chart of court orders granted for PDHs to the end of 2014 from the Central Bank figures.

The one-off increase in Q2 2013 is difficult to explain but is in the Central Bank release:

During the second quarter of 2013, legal proceedings were issued to enforce the debt/security on a PDH mortgage in 270 cases. Court proceedings concluded in 637 cases during the quarter, and in 350 of these cases the Courts granted an order for repossession or sale of the property.

Aside from the Q2 2013 ‘blip’ the increase in orders granted since Q2 2014 is clearly evident, though the Q1 2015 data which will show a further increase based on the courts’ data has yet to be released by the Central Bank.  Unfortunately the Central Bank do not provide the equivalent legal proceedings figures for BTL accounts. 

Of course, the most visible change in the past 18 months has been in the number of court proceedings issued by lenders which is a function of the moratorium from the CCMA and, more importantly, the Dunne judgement.

There is significant additional data in the figures produced by the Central Bank including how many possession orders granted are carried through to a court-ordered repossession. 

Both sources confirm that there was a large increase (relative to a small base) in the number of possession orders granted in Q2 2014.  As most orders are granted with a stay, sometimes of up to nine months, there will be lag between the increase in orders granted and actual repossessions.  The Central Bank data shows that there was a jump in the number of court-ordered repossession in Q4 2014 corresponding to the increase six months earlier in court orders granted.  This chart is taken from the previous post.

If we combine the two charts we can get a rough approximation of how the number of possession orders granted translates into court-ordered repossessions.

The number of court-ordered repossessions is consistently below the number of possession orders granted.  For the entire period the number of court-ordered repossessions is 40 per cent of the number of possession orders granted.  It is not clear how this will be affected when the big jump in the number of orders granted in Q2 2014 feeds through to the repossession numbers when the lag for stays and other delays has elapsed. This can be expected to average nine months or so.

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What is going on with Corporation Tax revenues?

Yesterday’s release of the April Exchequer Returns shows that tax revenues are €1,307 million up on last year and €505 million ahead of “profile”.  The most notable over-performance relative to profile can be seen for Corporation Tax which is €343 million ahead of the target for the end of April.

The monthly outcomes for Corporation Tax are:

The Exchequer tax profile was published in February so the January figure is the actual outturn which was known at the time.  It can be seen that Corporation Tax revenues in January 2015 were 600 per cent greater than those received in January 2014.

The profiles are based on a budget day estimate from last October of revenues of €4,575 million.  The actual amount collected in 2014 ended up being €4,614 million so the budget estimate was for a small reduction in Corporation Tax receipts (though the full-year revenues were obviously not known when the budget was published in October).

There can be many issues that affect Corporation Tax receipts and even if these became known since the budget, and particularly with the large increase seen in January, this would not be reflected in the tax profile which is the distribution of the budget day forecast over the year.

This issues aside the question remains: what explains the large increase in Corporation Tax receipts seen in the first four months of 2015?  For the first four months 2015 Corporation Tax revenues are more than 100 per cent up on 2014 revenues and the expected profile. There could be:

• timing issues so this over-performance may be unwound later in the year.
• one-off payments from companies related to non-recurring items such as CGT which is paid under Corporation Tax by companies (excluding CGT on gains from development land).
• increased value-added in Ireland possibly related to things like contract manufacturing or, as suggested to me elsewhere, EU VAT changes.

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