Friday, March 17, 2017

Mortgage repayments accelerate capital reduction

A lot of attention is right gives to mortgage arrears and property repossessions but it most also be remember that significant mortgage repayments are also being met.  Here is the total outstanding for PDH mortgage in the mortgage arrears statistics.

PDH Mortgage Balance

Since the middle of 2009 the amount of PDH mortgages has fallen from €118.7 billion to €99.6 billion. Still a long way to go you might say but the graph a above is not comparing like with like.  Each quarter is made up of different loans with some repaid and others drawn down.  New loans will will increase the total balance so repayments on the €118.7 billion of loans that was outstanding in Q3 2009 will be greater than €19.1 billion indicated by the chart above.

Figures from the Irish Banking and Payments Federation give the following amounts of PDH mortgage draw downs since the middle of 2009;

  • First Time Buyers: €13.2 billion
  • Mover-purchaser: €11.0 billion
  • Remortgages: €1.9 billion
  • Top-up mortgages: €1.5 billion

Some of these could be existing debt replaced by new debt.  To be conservative we will assume that all loans relating mover-purchases and remortgages resulted in no new debt being created, i.e. the amount of the new loans matched the amount of previous loans. 

There will be new debt from first-time buyers and top-up mortgages. Since the middle of 2009 there have been €14.6 billion of drawn downs on these loans.

This means that the stock of PDH mortgage debt of €118.7 billion has been reduced to €84.9 billion, a reduction of 28 per cent in seven years.  And if mover-purchases and remortgages resulted in additional mortgage debt being created (as they surely did) then this is the upper limit for the reduction that has taken place.  Let’s put it at 33 per cent.

That might suggest that there is another 14 years until the stock of debt from Q3 2009 is cleared for a total duration of 21 years.  But that is to misunderstand the nature of mortgage repayments.  Early in the term the majority interest will make up a greater proportion of the repayments than later in the term.  If the level of repayments remains the same then the rate of capital reduction will increase as the amount being consumed by interest declines.

For the estimated repayments looked at here.  The average reduction in the outstanding balance for the two years at the start of the series was €1.08 billion per quarter.  For the past two years this has average €1.32 billion per quarter.  As would be expected the rate of reduction in the outstanding balance is accelerating.

We are probably looking at the stock of PDH mortgage debt from 2009 being cleared in another ten years or so.  This gives an average term of 17 years.  Of course, this is just an average.  Some loans will be repaid quicker than 17 years and other might take a good bit longer.  But what ever about the persistent problems with arrears and repossessions it is also the case that there are ongoing repayments and the stock of legacy debt is reducing.

PDH Mortgage Balance Estimated Like-for-Like

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