moneysherpa believe that the Government and Central Bank are failing customers who have been sold off to ‘vulture funds’.
Although the name ‘Vulture Fund’ is commonly used, these funds, also known as non bank entity funds and closed funds, are usually backed by pension funds who are looking for low risk investments with a steady return and are common in financial markets around the world.
The important difference between mortgages with Vulture Funds and those with other lenders is that they are not open for new retail business. That’s why they are also known as closed funds.
The 85,000 Mortgage holders in Ireland with closed funds (‘vulture funds’) are more vulnerable than customers of ‘open’ funds (funds offering new mortgages) because.
- Closed fund customers may be tied to their lender due to not being able to meet open lender affordability tests, making them ‘mortgage prisoners’ leaving them open to predatory pricing.
- Closed funds are not actively competing for new business so are not constrained in their approach to their customers as Open funds.
It’s this lack of options that we believe is the key concern, where there is in effect a monopoly. When there is market failure as in this case, bad things can often happen to consumers.
If you have been out of arrears for more than 2 years and paying full capital and interest for more than a year a moneysherpa advisor will be happy to advise you for free here. If you are over sixty then even if you aren’t out of arrears equity release may be an option, if want to find out more check out our Equity Release Ultimate Guide.
We think that the current proposals to address these issues fall short of what is needed, being either unrealistic or even counter productive. The right approach to help vulture fund customers in our view is to focus on addressing the clear market failures.
For this reason moneysherpa believes, the regulator and government have a duty to protect consumers by lowering barriers to accessing the open market.
Within the 85,000 closed fund customers our analysis shows that there are three broad customer groups to consider
- Customers who can access the open market now – circa 26,000
- Customers who can’t access the market due to affordability tests- circa 38,625
- Customer customer who can’t access the market due to arrears – circa 20,375
Our estimates are based on the Central Bank non bank lender data reduced by the projected non bank lender share of open bank lenders and converted to actual mortgage holders using the 1.2 ratio of mortgages per mortgage holder als in Central Bank data as below.
| Closed Fund Status | Mortgage Holders |
|---|---|
| Total Closed Fund Mortgages | 90,104 |
| Performing Tracker | 25,625 |
| Performing & Fixed | 7,500 |
| Performing Variable | 12,500 |
| Restructured | 13,638 |
| In Arrears | 20,496 |
Within the 85,000 mortgage holders with closed funds we estimate there are around 59,000 ‘mortgage prisoners’ who are unable to move to the open market.
Current interest rates for these groups is estimated below based on Central Bank Jan 2023 data and assuming that the 1% ECB rate increase post Jan has been passed through to mortgage holders.
| Closed Fund Type | Mix | Mortgage Accounts | Mortgage Holders | Est Rates March ’23 |
|---|---|---|---|---|
| Closed Fund Type | Mix | Mortgage accounts | Mortgage holders | Estimated Rates March ‘23 |
| Trackers | 37% | 37,517 | 31,000 | 4.14% |
| Variable | 45% | 45,475 | 38,000 | 5.57% |
| Fixed | 18% | 18,000 | 15,000 | 2.57% (5.57% after fixed ends) |
| Total | 100,992 | 85,000 |
Based on these projections the majority of closed fund customers are paying or will be paying significantly above current market rates, which are typically around 3.5% APRC.
It should be recognised that a sizable group of these customers, over 30,000, are simply with closed funds due to the exit of HBOS and Danske bank from the Irish market.
Our report covers the following areas.
- Customers who can access the open market now – vulture funds Ireland
- Customers who can’t access the market due to affordability tests – vulture funds Ireland
- Customers who can’t access the market due to arrears – vulture funds Ireland
- Releasing Mortgage Prisoners – vulture funds Ireland
Read on for further analysis of the vulture funds customers and what should be done.
Customers with non restructured mortgages – vulture funds Ireland
53% of closed fund customers (46,294) are not in arrears and are paying the full outstanding capital on their mortgage. They are therefore in theory able to switch to open market lenders subject to meeting lender criteria.
- Affordability checks
- CCR requirements 2-5 outside of arrears
It’s unclear how many of these customers can switch in practice.
The most significant obstacle in practice is the lender affordability checks which include a mandatory 2% stress test on the prevailing rate required under the Central Bank Consumer Protection Code.
| Closed Fund Switching Examples | March ‘23 APRC | New rate APRC | Remaining Loan | Remaining Term | Current Repayment | New Average Repayment | Monthly Saving | Total Saving | ||
| Variable customer | 5.57% | 3.19% | €138,000 | 15 | €1,133 | €966 | €167 | €30,068 | ||
| Tracker customer | 4.14% | 3.19% | €173,000 | 15 | €1,292 | €1,211 | €81 | €14,626 | ||
| Fixed customer | 5.57% | 3.19% | €206,000 | 15 | €1,691 | €1,441 | €249 | €44,884 |
Therefore a typical performing closed fund variable rate customer @ 5.57%, €138,000 and 15 years outstanding, paying €1,133 a month may not be able to switch to an open market repayment of €167 less due to a combination of lender and Central Bank affordability rules.
Customers with Restructured Mortgages – vulture funds Ireland
22.5% of closed funds,19,000 in total, are classified as restructured of which 16,000 are meeting the terms of the restructure. This includes mortgage splits, capitalisation, reduced interest and term extension.
The 16,000 restructured mortgages meeting the terms of their restructuring may also be able to switch to the open market, although only to a limited set of products and lenders. The example shown below uses Finance Ireland Progress Plus rates, which are available to restructured customers, not in arrears for 2 years when paying the full capital and interest.
| Closed Fund Switching Examples | March ‘23 APRC | New rate APRC | Remaining Loan | Remaining Term | Current Repayment | New Average Repayment | Monthly Saving | Total Saving | ||
| Variable customer | 5.57% | 5.69% | €138,000 | 15 | €1,133 | €1,142 | -€9 | -€1,589 | ||
| Tracker customer | 4.14% | 5.69% | €173,000 | 15 | €1,292 | €1,431 | -€139 | -€25,061 | ||
| Fixed customer | 5.57% | 5.60% | €206,000 | 15 | €1,691 | €1,694 | -€3 | -€592 |
For both Variable and Fixed mortgage holders, if ECB rates rise above 3.5% returning to the open market could potentially reduce monthly repayments.
Customers in Arrears – vulture funds Ireland
Almost 24%, a total of 25,469 customers are in arrears of more than 90 days currently.
| Arrears Status | Accounts | Mortgage Holders |
|---|---|---|
| Total > 90 days arrears + | 17,723 | 14,178 (19%) |
| Of which > 5 years arrears + | 11,623 | 9,298 |
These customers may have fallen into arrears due to changes in personal circumstances or other reasons. There are very limited solutions for them in the open market, however equity release may still be an option as explained below.
Options for customers by group – vulture funds Ireland
Depending on individual circumstances there are different options open to these customers. We have broken it down into three main groups.
1 – Customers who can access the open market now – vulture funds Ireland
We estimate that 26,000 of the 85,000 mortgage holders with vultures are able to switch, based on taking the average salary and outgoings 45,625 performing non restructured loans, with the average salary and outgoings applied to current lender calculators.
These customers may not have chosen to move to the open market, by switching their mortgage lender, as they think there may be little benefit or may be unaware that they can.
We believe that there are in fact substantial benefits for the majority of customers of moving to the open market, by being able to fix for example or to be able to exercise market power and that these benefits may not be fully understood by consumers.
We believe that inaccurate or misleading media coverage around Vulture funds and lack of communication by active lenders and brokers may have led to a false perception that these customers are ‘mortgage prisoners’ when they are in fact free to move.
2 – Customers who can’t access the market due to affordability tests – vulture funds Ireland
We estimate that there are 38,625 customers who can’t access the market due to affordability. These customers are either paying the whole value of the loan, but can’t pass affordability checks due to changed credit rules or circumstances, or are only currently paying off part of their loan.
These customers are not in arrears, but are currently ‘mortgage prisoners’ as they can not pass the open market lender affordability tests.
- Some of these customers are being stopped moving by the Central Bank CPC stress test requirement of 2%.
- Some of these customers would still fall below affordability thresholds if this test was to be removed.
3 – Customers who can’t access the market due to arrears – vulture funds Ireland
These customers 20,375 are in arrears and are currently ‘mortgage prisoners’ as it is unlikely another lender would take them on due to their credit history.
There are some exceptions to this, in particular equity release for those over 60 is not dependent on credit history and is a way to pay off the closed fund in return for giving away a slice of your property when you leave the home.
However for most people, it is unlikely they have any open market options currently and are therefore the group most in need of protection from predatory pricing.
Releasing Mortgage Prisoners – vulture funds Ireland
moneysherpa are advocating for a number of changes from both government and the funds themselves to help those customers who are currently trapped or believe themselves to be trapped with closed funds.
1- Customers who can access the open market
The Government and/or the Closed Funds themselves should fund free independent financial advice to all closed fund customers currently able to access the open market.
This advice would include a full comms plan administered by the funds, website and advice services provided by the government and government agencies such as Citizens Information and/or MABS.
2- Customers who can’t access the market due to affordability
The Central Bank to work with lenders to develop more flexible affordability test for customers who are reducing their repayments by returning to the open market and to remove the CPC stress test for any customer moving to a lower average repayment over the mortgage term
The Government should also fund an equity grant scheme modeled on First Home scheme to bridge the affordability gap by reducing the required open market mortgage to a level that can be afforded by the customers and return closed customer to open market.
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.
Next Steps- vulture funds Ireland
We are keen to understand the circumstances around mortgage prisoners as well as we can, so that we can lobby and develop ways to help.
If you have been out of arrears for more than 2 years a moneysherpa advisor will be happy to advise you for free here. If you are over sixty and want to find out more about equity release as an option, check out our Equity Release Ultimate Guide.
We are keen to understand the circumstances around mortgage prisoners as well as we can, so that we can lobby and develop ways to help. We have also opened a thread on this topic on askaboutmoney.com here.
If you have any views or experience that you would like to share with us, please get in touch with us mortgageprisoner@moneysherpa.test.inview.ie
