Bank of Ireland is taking a different approach to split mortgages

By Business Editor David Murphy

Bank of Ireland chief executive Richie Boucher is on collision course with the Central Bank over mortgage arrears.

The issue revolves around his bank’s treatment of customers who are being offered split mortgages.

The idea behind these products is straight-forward; half of a mortgage is put on ice while the home-owner repays the other half.

If, after 20 years, the customer pays off half the mortgage – call it ‘Part A’ – then the bank and client can see if some, or all, of the remaining ‘Part B’ can be repaid.

However if the home-owner is retiring on a reduced income and has no chance of repaying ‘Part B’, then it could be written off.

This all sounds fine in theory; the practical problem is that the banks are treating the ‘Part B’ differently.

AIB is applying no interest, Permanent TSB is charging 1% but Bank of Ireland is levying full interest.

This has a significant impact on what remains after ‘Part A’ is paid off.

Take the example of a customer who is in arrears and has a €400,000 mortgage.

If the bank splits the debt into two loans of €200,000, with Bank of Ireland ‘Part B’ would grow in size from €200,000 to €450,000 over 25 years at an average interest rate of 5%. But in the case of an AIB the loan would remain at €200,000.

This anomaly has not been missed on the Central Bank, which is expected to address the issue with Bank of Ireland.

Speaking generally, Financial Regulator Matthew Elderfield said: “We will have dialogue with the banks if we think the split mortgages are not being done on sustainable terms.”

Compared to other Irish lenders, mortgage arrears at Bank of Ireland are not the worst at just under 10% (Permanent TSB’s rate is 16%). But Bank of Ireland’s figure is terrible compared to other countries.

British lender Lloyds has an arrears rate of 2.3%.

The fact Bank of Ireland is trying to charge full interest on split mortgages means its so called “solution” to the arrears crisis is next to useless.

That raises the question of how seriously Richie Boucher is taking the home loans crisis.