08 Oct 2009 

THREE out of four mortgage holders have a variable rate mortgage, making them dangerously vulnerable to a rise in eurozone rates.

A new survey by the Central Bank shows that 80pc of homeowners with a mortgage either have a tracker or a standard variable rate loan.

Both of these types of variable mortgages are liable to hikes.

As soon as the European Central Bank (ECB) moves rates above their record low of 1pc, those with trackers will face a rise in repayments.

But people with standard variable rate home loans are vulnerable to rises irrespective of what the ECB does.

This is because lenders can increase standard variables whenever they want.

Permanent TSB has already upped its standard rate for existing customers, with other lenders indicating that they will follow suit.

The Central Bank study shows that 80pc of those with a mortgage have either a tracker or a standard rate mortgage.

This is up from 50pc in 1999, and Irish people have one of the highest proportions of variable mortgages in Europe, the paper by Central Bank economist Nicola Doyle entitled ‘Housing Finance Developments in Ireland’ indicates.

“There are 200,000 mortgage holders right now who are open to price rises at the whim of their lender,” mortgage broker Karl Deeter warned.

“Permanent TSB’s actions have already demonstrated that’s a real threat.

“As if negative equity and collapsing property values were not enough to contend with, they may also be forced to absorb higher profit margins which the banks want to charge in order to remedy their errors of the past.”

Mr Deeter said that most of the people in this situation were not aware of the threat and will not realise the risk until its too late.

However, there is no immediate threat of a rise in ECB interest rates, and economists believe they will be kept at 1pc until the third quarter of 2010.

The data is likely to add to European Central Bank caution not to withdraw its monetary stimulus prematurely when the ECB meets to decide interest rates today.

Economists believe the ECB will keep rates at a record low 1pc until the third quarter of 2010 despite signs the eurozone may have returned to growth in the third quarter of 2009.
Figures out yesterday show that the eurozone’s economy shrank more than previously thought in the second quarter of 2009.

This was because contributions from household demand and trade turned out to be smaller than initially estimated.

Gross domestic product in the 16-country area shrank by 0.2pc in the April-June period quarter-on-quarter and by 4.8pc in annual terms, compared with the previously reported falls of 0.1pc and 4.7pc, Eurostat said.

Irish Independent

13 Oct 2009

Mortgage holders face hikes of 40% or more in their mortgage protection premiums because so many people are claiming on their policies due to loss of earnings in the recession.

The latest company to confirm it is to raise the premiums is Genworth Financial, which has a 37% share in the mortgage protection market and which underwrites cover sold to many of the country’s top lenders.

In letters sent out by financial institutions through which Genworth Financial offers its products, customers were told the pricing of mortgage protection policies had been developed at a time when unemployment was at historically low levels and was based on the level of forecasted claims at that time.

“Unfortunately, as you are aware, the economic environment has deteriorated rapidly over the past year which has resulted in an unprecedented surge in unemployment in Ireland since the beginning of 2008,” the letters said.

“As a result Genworth Financial is experiencing a dramatic increase in the number of claims submitted for unemployment submitted on our Mortgage Payment Protection insurance policies. Claims incurred in the last nine months alone have exceeded all of the claims in the preceding five years… we have agreed that in order to ensure the future sustainability and viability of this cover for all insured members we regrettably need to increase the monthly cost of the cover. This is a situation that is being faced by all providers of mortgage payment protection insurance in Ireland.”

It said a policy premium increase of an average of €9 per month had been added to customers’ bills. However, some customers have found their increase is as much as €18 or 40%.

“We hope to avoid further increases but this will depend on the economic situation,” customers were told in the letters. “We are making the price increase in response to the rise in the national unemployment rate and also in anticipation that it might continue to rise in the near future.”

Furthermore, the company has lengthened from 30 to 60 days the period which must elapse from the start of a new policy before people can make a claim on it.

Earlier this year Cardif Pinnacle, which underwrites the redundancy insurance sold by members of the Professional Insurance Brokers Association, upped its premiums from €57 to €78 a month for monthly mortgage payments of €1,200.

19 Oct 2009 

The collapse in the housing market has left the average household sitting on €43,000 of negative equity.

A borrowing frenzy during the boom means Irish households are now nursing debt levels which are the fifth highest in the developed world.

The average household owes €230,000 on its mortgage alone, excluding credit card, personal loans and other debts.

These figures have emerged from calculations based on a new report on the economy from Goodbody Stockbrokers.

Goodbody’s Dermot O’Leary estimates that the bursting of the housing bubble has sent house prices down by 40pc from their peak in February 2007.

This means the average house in the State is now worth around €187,000.

There are 640,000 households with a mortgage, and the average household is sitting on negative equity estimated at €43,000, calculations based on the Goodbody report by the Irish Independent show.

The State’s 1.5 million households are now struggling with an overall mortgage debt mountain that has climbed to €148bn, leaving mortgage holders hugely vulnerable to a rise in European mortgage interest rates.

Slashed

Total residential mortgage debt is up from €99bn in 2005.

Mr O’Leary pointed out that the slashing of interest rates by the European Central Bank in the past year, from 4.25pc to a record low of 1pc, had saved mortgaged households a combined €3.1bn in interest payments alone.

The dive in interest rates means that a family with a €300,000 mortgage is paying around €500 less a month in mortgage repayments than this time last year.

“However, this reprieve will soon come to an end,” he warned, stressing that there will be no further cut in rates, and instead interest costs will go up from 2011 on. “At this stage households will face increased pressure to meet their debt servicing obligations,” the Goodbody commentary stated.

“The collapse in the housing market and the onset of the recession has meant Ireland has experienced a wealth destruction of vast proportions, one which is set to continue for some time,” the economist said.

Households have piled up so much debt that they now owe an average of €112,000 on mortgages, credit cards, overdrafts and car loans.

Unsecured

But as only 640,000 Irish households have a mortgage, the mortgage debt alone amounts to €230,000 for these families.

The average Irish household owes €16,000 on unsecured debt, such as credit cards and bank loans, calculations by Mr O’Leary and the Irish Independent indicate.

Mr O’Leary said high private sector debt levels were of greater concern in the medium term for the Irish economy than public sector debt. “Given that Ireland is one of the most indebted economies in the developed world, we have benefited most from the collapse in interest rates,” he said.

However, he thinks families will be able to absorb rising interest rates, because we have a younger population than other countries.

Goodbody predicts the economy will shrink by 1.1pc next year, but that it will grow by 2.4pc in 2011. Previously the brokers had forecast the economy would shrink by 3.7pc next year, and grow by only 1.2pc the following year.

Mr O’Leary said he is now more confident of a speedy recovery in economic growth.

19 Oct 2009

Property prices in Ireland could fall as much as 45 per cent from levels seen in late 2006, as the economic downturn and increased costs of funding the banks weigh on the market.

According to Fitch Ratings, the average house is curently worth 7.5 times the average income, a ratio that is expected to fall to nearer 5.5 times the average individual income.

“Tax rises, high unemployment, wage deflation and property supply overhang continue to undermine the country’s property market,” says Alastair Bigley, Head of Irish RMBS at Fitch.

Property prices have fallen 24 per cent to date from a peak in December 2006, Fitch said.

“Despite almost three years of house price declines, prices have yet to reach a sustainable level of affordability,” says Douglas Renwick, Associate Director in Fitch’s Sovereigns team.

The difficult market will be further pressured by a rise in the cost of funding to financial institutions, driven by a higher than expected cost of the European Union’s guarantee of banks’ debt issuance compared to the current Irish state guarantee and a rise in inter bank lending rates.

Unemployment rates are also forecast to rise, reaching 12.5 per cent by the end of 2009, and 15 per cent in 2011.

“Fitch expects all lenders to increase their mortgage rates and it seems certain that mortgage affordability will suffer against a backdrop of a generally higher tax burden, increasing unemployment and negative to zero wage inflation,” said Michael Greaney, associate director in Fitch’s RMBS group. “Fitch therefore expects further house price declines and late stage mortgage arrears to rise.”

 21 Oct 2009

The cost of a mortgage for first time buyers will have dropped by 50 per cent by December, compared to three years ago, according to a new forecast.

The quarterly EBS / DKM Affordability Index predicts that the cost of a mortgage for the average first time buyer working couple will fall to 13 per cent of their net income by December.

Three years ago, a first time buyer couple would have spent on average 26.4 per cent of their net monthly income on mortgage repayments for a new home.

The EBS/DKM Housing Affordability Index is a measure of the proportion of after tax income required to meet first year mortgage repayments for an average’ first-time buyer (FTB) working couple, each on average earnings with a 90 per cent mortgage. It takes into account changes in mortgage rates, changes in the level of mortgage interest relief, and is based on average earnings and average FTB new house prices nationally and in Dublin.

First time buyer mortgage repayments are expected to be 44 per cent lower by the end of the year compared to 2007, equivalent to €539 per month, according to the index.

By December, the projected net repayments for a first-time buyer working couple on a €165,000 mortgage will have fallen by €513 per month since July of last year on a national basis. The equivalent drop in Dublin will be €643 per month, or 41 per cent.

According to Dara Deering, director of membership business at EBS, while the overall number of national first time buyer’s transactions had fallen to 3,184 this year, there is evidence of an increase in activity in the market in recent months.

“The number of mortgage applications at the society has grown by 66 per cent over the past three months when compared with the first three months of the year. September was a particularly busy month with more than double the level of applications that we received in February. A significant portion of this activity is being driven by first time buyers who now account for 45 per cent of the house purchase market,” said Mr Deering.

“While there continues to be a lack of clarity about how far the market has yet to fall, the reality is that for many first time buyers, and indeed second-time buyers, the home that they want, in a location that is suitable for them is likely to be very competitively priced at the moment. The increased volume of applications, albeit in a declining market, indicates that growing numbers of people are considering taking advantage of the current levels of pricing at this time,” he added.

29 Oct 2009

IRISH banks continued to turn the screws on borrowers in the third quarter as they tightened lending conditions for mortgages and loans to businesses.

The five Irish banks who took part in the euro banking survey said they would leave the criteria for commercial lending unchanged for the last quarter.

As the banks tightened their lending policies, demand for credit fell further, the Bank Lending Survey (BLS), done on a quarterly basis, found.

Lending policy for non-mortgages over the period was left unchanged.

In the three months to end September demand for loans from households decreased across both categories examined during the third quarter of 2009.

Demand is expected to remain unchanged during the final quarter of 2009. The survey also found that for the Irish banks access to wholesale funding remained “challenging” during the quarter.

In its comments on the other eurozone banks the European Central Bank said “fewer” banks in Europe were setting tougher loan standards, implying that banks are becoming more willing to lend as the credit crisis eases.

Banks continued to tighten their policies on lending in the quarter but less than they did in the previous quarter, but the lifting of restrictions favours businesses more than consumers, the survey said.

That change “further confirms the indications of a turning point in the tightening trend observed at the time of the April 2009 survey,” the ECB said.

“At the same time, it needs to be kept in mind that the cumulated net tightening during the financial turmoil has not yet started to reverse itself and remains very substantial,” it added.

For the fourth quarter more banks are expected to loosen credit standards to businesses than to tighten them.

The degree of net tightening for business credit at 8% was the lowest since banks began toughening their terms two years ago when the financial crisis broke.

The survey did not signal the credit cycle had turned — a key factor for the ECB in deciding when to start tightening its generous liquidity supply and record low interest rates.

While the results are going in the right direction they did not signal the end of tough credit conditions in Europe, analysts said.