PTsb are going to take away investors tracker mortgages unless they go to capital and interest payments, that story was broken by Charlie Weston in the Independent today. That is a business decision by them, but for the business affected (landlords) it creates a new problem.
How can they do this? Isn’t it part of the new rules that banks can’t take your tracker from you? Yes and no, if you bought a property as an investment you are not covered by the Consumer Credit Act 1995 (you are not acting as a consumer) or the Code of Conduct for Mortgage Arrears. So any renegotiation can result in the loss of a tracker, staying on interest only (if you are with Ptsb – and others will follow suit) will require moving to a variable rate.
We’ll look at a standard example: Take Joe, he is married and earns €45,000 p.a. and his wife Kate makes €30,000 they bought an investment property with their SSIA’s (€30k deposit on a property for €300,000 in 2006). They have a child and a primary home with a mortgage of €250,000 on it. A generic family income statement is below
In this scenario – where the loan is on interest only, there is a a high ratio of costs to income at 62%, over 65% is where people tend to start defaulting. The savings tend to focus (in many families) in the area of General Expenses, cutting back on various day to day costs, so there is a little room for manoeuvre left in there.
Going to a repayment mortgage however, gives the following situation – and now these people are into ‘struggling seriously’ territory. With only €310 per week to cover any expenses we have not accounted for and unforeseen events. Recent research by the British Building Societies Association has shown that about 1/3 of arrears occur due to ‘Financial Circumstances’ outside of job/income loss, ie: something comes up that uses your available income and you miss payments because of it.
If you both had to drive for work and your car broke down that might be what gets you, in any case, for these people (who would be considered middle of the road middle class) they would be at risk if they went to a repayment mortgage. It sucks to be a landlord (caveat: if you used finance to do it with)
Couple this with the economic fisting we are about to get and it means that this couple could be earning significantly less next year, if one of them loses their job or takes a significant wage cut then they will go under, 2011 will be a very testing year for a lot of people, and in particular it will be a year in which a second wave of mortgage shocks hits the banks, further deterioration in the regular residential loan book and the residential investor loan book will likely come to the fore.