Interest-only loans more likely to be in arrears

INVESTORS on a mortgage deal that sees them paying back only interest on their buy-to-let loan have a greater tendency to be in arrears, according to a new Central Bank study.

Interest-only deals were popular during the last housing boom, often being taken out on expensive properties.

The situation could get worse as a third of borrowers paying interest-only are set to switch to paying a traditional capital and interest mortgage between now and 2022.

The study has found that interest-only loans were extended mainly to buy-to-let investors and were most popular in the run-up to the boom, between 2004 and 2008. Up to 2008, around 40pc of buy-to-let loans were interest-only.

But since 2015, the proportion of interest-only mortgages has dropped back to less than 1pc of buy-to-let loans, the Central Bank study found.

The study found a higher tendency for interest-only mortgages to be arrears.

“There is a large share of non-performing loans among interest-only mortgages, higher by 11pc at end-2017 compared to other mortgages,” the report states.

Central Bank economists Edward Gaffney, Christina Kinghan and Ciarán Nevin said investors often take out interest-only loans in the hope of selling at a greater price once the interest-only period ends.

But these investors who took out pre-crash interest-only loans were left with huge debts once the market collapsed.

“Given the potential risks, it is important to monitor interest-only lending trends and the characteristics of loans originated on this repayment schedule,” the regulator warned.