‘VULTURE FUNDS’ OWN the mortgage contracts of around 85,000 Irish households. These households may not be able to fix their mortgage rates unlike those with retail lenders such as PTSB, Bank of Ireland, AIB, Finance Ireland, ICS and Avant Money.
This week, in a surprising development a judge in Tullamore ruled that a vulture fund had to provide a fixed rate to a couple who had applied for a Personal Insolvency Arrangement (PIA). On the face of it, this judgement seems to open the door to more fixed rate deals, but that door seems likely to slam shut again as the basis for the decision is likely to be challenged.
Recent reporting has even indicated that if this decision is replicated funds may struggle to service their loans, as at these mandated rates they may not be able to cover their commitments. Whatever the outcome, it should not be left to the courts to deal with this issue on a case-by-case basis, a more proactive and constructive approach is required.
Although many assume that the mortgages in this situation have ‘gone bad’, in reality only around 20,000 of them are currently behind in their repayments. In fact, many people with the Vulture Funds have never been in any financial trouble, ending up with the funds through sheer bad luck. A sizable group of these customers, over 30,000, are simply with these funds due to the loan sales that were made when Bank of Scotland and Danske Bank got out of the Irish market. Others were given 100% mortgages that retail lenders no longer want or have seen their financial circumstances change through divorce, illness or job loss.
They now find themselves with the Vulture Funds often serviced by companies like Pepper Finance Ireland or Start Mortgages.
Unlike retail lenders, Vulture Funds don’t offer fixed-rate mortgages, so any increases in the rate that the ECB lends to other lenders are passed straight through to them. Someone paying 5% this time last year is now on 8.75% compared to retail lender rates of around 3%.
Through no fault of their own, many are now facing interest rates of 7% or more on their mortgages, with crippling increases in repayments and the risk of slipping into arrears now looming.
The nub of the issue is that only around 25,000 of the 85,000 Vulture Fund customers can switch to retail lenders to get a lower fixed rate.
The remaining 60,000 known as ‘mortgage prisoners’ don’t meet the retail lenders’ entry criteria for a mortgage. They can’t fix with their current lender and they can’t switch to a new lender.
Around 40,000 of these customers are still scraping together enough money each month to successfully make their full mortgage repayment.
The average variable rate with a Vulture Fund right now is around 5.75%, so a household with €250,000 and 10 years outstanding would have to find €2,744 a month in repayments. If they were allowed to switch however they would pay €308 less a month, that’s €3,696 less a year.
The frustrating thing for these customers is they often can’t switch to these lower repayments. This is because the retail lenders say these customers can’t afford the repayments, even though they are managing to make higher repayments with their current lender.
I’m advocating for a number of changes from the Central Bank and the government to help those customers who are currently trapped or believe themselves to be trapped with Vulture funds.
Many vulture fund customers currently believe incorrectly that they have no options to reduce their repayments. In actual fact, they may be able to borrow enough to switch their mortgage to a lower fixed rate or if they are over 60 may be able to release equity to pay down their mortgage entirely.
The Government should fund free independent financial advice to all closed-fund customers currently able to access the open market.
This advice would include a full communication plan administered by the funds, website and advice services provided by the government and government agencies such as Citizens Information or MABS.
The Central Bank needs to work with lenders to develop a more flexible affordability test for customers who are reducing their repayments by switching mortgage to a retail lender or any customer moving to a lower average repayment over the mortgage term.
The Government should also fund an equity grant scheme modelled on the current First Home Scheme to bridge the affordability gap by reducing the required size of the mortgage to a level that retail lenders can accept.
The Central Bank should review if a price control mechanism, such as a margin cap, would be appropriate to ensure that the risk of potential predatory pricing by lenders is reduced.
In the UK the London School of Economics has recently published a set of proposals including free advice and an equity release scheme to address the issue of Mortgage Prisoners there.
I’ve spoken to many people facing these issues recently, some of whom feel embarrassed by their situation and have not sought help or support as a result. There is no need for this and there are solutions to be found here.
Moneysherpa has produced an in-depth Vulture Fund Ireland report laying out both the issues and potential solutions. The data for the report and this article are available at Mortgage and Housing Statistics Ireland.
Mark Coan is a financial expert and founder of online money guide moneysherpa.ie. Email: mark@moneysherpa.ie. For more information on the campaign to raise awareness of the issues around mortgage prisoners contact Mark at mortgageprisoner@moneysherpa.ie.
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