IF YOU TOOK a mortgage break, will it stain your record? Will your mortgage break be held against you by your bank?
Back in March, we were “all in this together”, and it felt like it. Today, there are some chinks appearing in this way of thinking.
Weeks before we saw crowds of people drinking takeaway pints on South William Street, the “all in this together” spirit was showing signs of weakness in more venerable quarters, namely Ireland’s institutional banks.
Supportive institutions
In March, as the pandemic swept the land and we all took a national effort to flatten the curve, the banks showed great solidarity.
As employment fell off a cliff, the banks wanted to ensure that we didn’t lose sleep over our loans and mortgages. They very quickly arranged a special agreement; not just amongst themselves but also with the central bank.
The agreement was an absolute requirement for Irish society at the time; most people were concerned about their health, financial future; families and commitments. Life as we knew it was suddenly gone. The deal reached by the banks and the central bank had several unusual and generous elements.
First of all, the deal meant that if you wanted to get a break for three months, you could do it with a phone call. The phone call was straightforward, and most people on social media who told me about their experience said it was very positive and swift.
Credit where it is due here, the banks pulled staff from all over their businesses to react to what has been reported as up to 7,000 calls per day from worried customers. They dealt with these calls in a manner that gave people comfort and support. The banks did well.
The second interesting part of the agreement was a little technical but has some quite serious implications. The central bank agreed the loan would be recorded differently on the banking systems and more importantly on peoples’ credit reports.
People were told and reassured by their bank that if they take a break, it would not affect their credit in the future. In fact, it wasn’t even going to be recorded.
This part of the deal is crucial for a bank’s customers. Imagine a fictitious couple sitting at home; he is worried about his wages and wants to take a break from the mortgage, but his partner is concerned about the mortgage and the long term impact of ‘taking a break’.
The banks come out and convince them both that this ‘break’ will not be held against them in the future; in fact, it will be completely forgotten about. It never happened.
Now think about our couple’s discussion, they are both losing sleep but the question now changes from “should we take a break” to “why wouldn’t we, it means we can sleep at night”. The banks are in this with us, and they’re telling us they are taking unprecedented measures in unprecedented times.
The first cracks appear
Very quickly, the initial green-jersey exuberance of the banks showed signs of weakness. The bean counters who rule the ledgers of these institutions promptly made it known to their executives that they disagreed with the initial emotional response. Business is business.
Firstly, banks decided they would continue to charge you interest if you took a break. It meant if you owed €100,000 on your mortgage at the start of the break you would owe €100,000 plus interest by the end of the ”break’.
I was quite vocal at the time about my disappointment with this. I felt the banks needed to remember that 12 years ago, Ireland bailed out its banks. Here was a chance for these institutions to show the same courtesy to the people of Ireland. They didn’t take that opportunity.
I would also suggest ‘interest charged’ was a surprise to former Taoiseach Leo Varadkar. At the time, he had called this a mortgage “freeze.” It seems the banks disagreed with Leo.
The second and significant kink appeared in recent months. It turns out when the banks told us: “If you take a break, it will be ignored in the future” was not actually the case. This turning of the coat could be very significant for many customers of Ireland’s banks.
Yes, your credit record won’t reflect the fact you took a break, but that doesn’t mean the banks are ignoring it as they told us they would.
Senior executive
I have spoken to a senior executive within one of our largest banks who told me “you would need to be clear for at least six months”. When they say “clear” they mean if you have taken a break in the last six months you won’t be attractive to them.
It is important to say; no one said it would be a total red card if you applied for more finance, but it was part of an overall decision framework. In other words, it was a stain on your record.
My discussions with banking executives are being echoed in the mortgage broker community who have confirmed they are getting the same reactions across the banks.
I also spoke to people across my social media channels and other avenues. And yes, banks are asking people if they took a break during the first lockdown.
In some cases, the banks are asking you to upload your mortgage statement to show you are back on full payments and I have heard that banks are using the credit reports to see if the amount you owed on your mortgage decreased in the months between March and September 2020. When they see it didn’t come down, they are quizzing people on what happened.
The mortgage break could now be a blemish on your financial soul. Is this fair?
Credit is still rolling
There is no evidence to suggest that everyone who took a break will be refused credit. People being denied loans now may well have been refused for other reasons. To be crystal clear, there is evidence that people who took breaks are still getting loans today.
My problem with all this is that the customers of the banks received assurance that taking a debt payment break during these unprecedented times would not be held against them.
Customers of the banks were led to believe any record of the ‘break’ would be forgotten. Wiped out. Not an issue. Why then are all the banks asking customers if the availed of the ‘break’?
How will they know I took a break?
If you did take a mortgage break, your break was not recorded by the Irish Credit Bureau or the Central Credit Register. The fact this was facilitated by the central bank means that [longterm] this won’t have an impact on you.
But for now, while the banks are still asking you about ‘breaks’ then it means it’s forming part of their decision to give you money or not.
It begs the question: Why did the banks push so hard to protect peoples’ credit history, not record it, and then ask their customers about it anyway? A theory I have is that it was in their interests to do so.
A bank with a healthy loan book can borrow money quickly and cheaply from other banks. The bank can then stay within strict central bank rules and ultimately lend out more money.
If all mortgage breaks in Ireland were recorded as being in arrears of 90+ or 180+ days or if it was recorded as a moratorium, it would affect the creditworthiness of the Irish banks themselves.
I will let you decide for yourself. Back in March, when we were all in this together, did the banks do something quite clever yet self-serving? Did they publicly appear to back their customers while at the same time use the very same people to boost their own credit ratings?
Does the fact that the banks benefit from their customers’ ‘clean’ records suggest they had other motives?
Eoin McGee CFP, Author of “how to be good with money”. Find him at Twitter, Instagram and Facebook.
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