Mortgage arrears in danger of spiking even as ECB starts to cut its rates

The expected European Central Bank (ECB) June interest rate decision will mark a long-awaited turning point for mortgage holders in Ireland and across Europe. The expected reduction, the first cut since the ECB started to hike rates about 22 months ago, will certainly be a relief to many homeowners, particularly those on tracker mortgages. However, the benefits of the expected June rate cut – and any others that may follow – will only go so far and ironically come at a time when many more Irish homeowners could begin to struggle with servicing their mortgage.

By the start of June, around 70,000 Irish homeowners will have seen their fixed rates expire over the past year – the equivalent of about one in 10 residential mortgages, according to the Central Bank of Ireland. Many of these people have already seen, or will soon see, a big increase in their monthly mortgage bills.

And the choice of interest rates then open to them will be far less attractive than the rate they were on. Many households simply do not have the financial cushioning to withstand this increased demand on their finances.

For some borrowers, particularly those whose incomes have not risen much or have fallen since they took out their home loan, there will be a greater risk of mortgage arrears – and the recent increase in short-term arrears is evidence that this is already happening. The latest Central Bank figures reveal that early mortgage arrears rose by 3 per cent in the final quarter of 2023 – and this could be just the tip of the iceberg. Remember, in addition to the 70,000 mortgage holders who have seen their fixed rate expire over the year to date, tens of thousands more will roll off ultra-low fixed rates before the end of this year.

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The expiry of a fixed-rate mortgage will pose an additional challenge to mortgage holders already struggling with existing arrears or who have previously been in arrears. Customers who have fallen behind on their mortgage repayments in the past are particularly exposed.

As the Irish banks didn’t hike their variable rates in line with ECB rate increases in 2022 and 2023, they will likely be slow to reduce them following ECB cuts later this year

For many, there’s an expectation that once the ECB cut its rates, this will result in an immediate reduction in variable and fixed rates for consumers. While there has been some tweaking of green mortgage rates recently, as well as cuts by some lenders to their mortgage rates, we must remember that the market has already priced a number of expected ECB rate cuts in the second half of 2024 into the current fixed-rate deals.

In addition, as the Irish banks didn’t hike their variable rates in line with ECB rate increases in 2022 and 2023, they will likely be slow to reduce them following ECB cuts later this year. So the current variable and fixed-rate mortgage deals are probably as good as it’s going to get for some time.

[ Mortgage rates hit highest level since August 2017 ]

Even if, as some predict, the ECB cuts its rate two or three times this year, its main refinancing rate – the rate that has a direct impact on the mortgage repayments of borrowers with trackers – will still be a far cry from the zero it stood at before interest rates started to rise in July 2022.

Most banks and loan servicers are currently enhancing their loan arrears management resources to ensure that they get ahead of the problem and limit the impact of non-performing loans on their financial performance. The challenge will be to ensure that adequate resources are in place to continue with business-as-usual activities while also responding to the needs of a growing number of customers in financial difficulty. The imminent structural change in Ireland’s retail banks could see many experienced personnel be reassigned to arrears departments. In turn, staff shortages could see banks struggle to process new mortgage applications expediently.

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For those who do fall into difficulty with their mortgage repayments, there are a range of options such as loan restructuring, term extensions, split mortgages, interest-rate reductions and mortgage payment breaks. But experience suggests that people are simply not aware of the avenues of support and resolution options available to them. More needs to be done in this regard, to impress upon homeowners that early communication and intervention is key to limiting the effect of the financial strain and to boost the chances of agreeing an Alternative Repayment Arrangement (ARA) with their lender.

It is important that the Central Bank and lenders alike are ahead of the game when it comes to mortgage arrears, particularly given the likelihood that more homeowners could now fall into this predicament as they roll off low fixed rates

The Central Bank is set to enhance the protections available to those in or at risk of mortgage arrears as part of its ongoing review of the Consumer Protection Code. Under one proposal put forward by the Central Bank, more information must be provided by firms to borrowers around whether or not the borrower is to be offered an ARA if they are experiencing difficulties with meeting repayments. The Central Bank is also proposing that a 12-month validity period be introduced for the Standard Financial Statement (SFS) where a borrower, who is encountering difficulties repaying their mortgage, sets out their financial situation. The SFS is used by banks to assess what ARA, if any, will be offered to the borrower and there have been some calls for a minimum 12-month validity period to be introduced for it.

ARAs will ultimately help people in mortgage arrears to continue to repay their mortgage and hold on to their home, so these changes could certainly be a step in the right direction.

It is important that the Central Bank and lenders alike are ahead of the game when it comes to mortgage arrears, particularly given the likelihood that more homeowners could now fall into this predicament as they roll off low fixed rates. Experience has taught us that acting early is key to successfully solving mortgage difficulties. So while June 6th will likely see the tide turning on ECB rates, we cannot afford to be complacent on mortgage arrears.

Ronan Brennan is head of retail banking service delivery with Delta Capita