Payment breaks provided a major source of temporary relief to Irish households and firms at a time of extraordinary financial stress

• 67,000 COVID-19 payment breaks applied to owner-occupier mortgages in Ireland at the five major retail banks at end May
• Loans with a history of repayment difficulty and engagement with their lender were more likely to avail of a payment break
• SME borrowers significantly more likely to utilise a payment break compared to Large Corporate borrowers

The Central Bank of Ireland has today published two Financial Stability Notes (FSN). Both these FSNs show that COVID-19 payment breaks provided valuable cash flow relief to households and businesses across Ireland in the wake of the pandemic. The first FSN, written by Edward Gaffney and Darren Greaney, entitled “COVID-19 payment breaks on residential mortgages”, describes the characteristics of Irish owner-occupier mortgages at the five major retail banks that were on COVID-19 payment breaks at the end of May 2020. The second FSN, entitled “Which firms took COVID-19 payment breaks?”, written by David Duignan and Niall McGeever, examines which Irish firms took COVID-19 payment breaks.

Gaffney and Greaney’s research notes that by 29 May 2020, over 67,000 COVID-19 payment breaks applied to owner-occupier mortgages in Ireland at the five major retail banks, covering one-in-nine mortgages worth over €10bn in loan balances. By August 2020, almost half of payment breaks on residential mortgages had ended with a return to full payments.

The FSN finds that current or previous payment difficulties are the strongest available predictors of COVID-19 payment breaks at retail banks. By value, 21% of lending with current forbearance, and 18% of lending with a history of forbearance, had a payment break. Only 9% of loans with no history of forbearance had a payment break. By origination date, payment breaks were most common among loans originated during the peak of residential mortgage credit in the mid-2000s. In total, 53% of all payment breaks were on mortgages originated between 2004 and 2008. Loans issued since 2010 are the least likely to have a payment break, with loans issued since the introduction of the mortgage measures in 2015 less likely than the average mortgage.

In addition, the FSN finds that those who borrowed higher multiples of their annual income (loan to income ratio) were more likely to have a payment break. The payment break share almost doubles between loan to income (LTI) shares of 2 and 4.5.

In the second FSN, Duignan and McGeever’s research shows that borrower sector is the strongest predictor of payment break uptake by Irish firms. Sectors with a high share of employees either on wage subsidies or temporarily laid-off had the highest payment break rates. The highest payment break rates were in the Accommodation & Food, Arts, Entertainment & Recreation, and Other Services sectors. 47% of Accommodation & Food balances had a payment break, rising to 59% when looking at SME balances in isolation. In addition, 45% of Arts, Entertainment & Recreation SME balances had a payment break.

The FSN goes on to say that performing loans (those not classified as a Non-Performing Loan/NPL) with weaker pre-COVID credit quality were moderately more likely to have a payment break. Loans that were performing in December 2019 and with a record of being NPL at some point in the past are also more likely to have a payment break than performing loans with no NPL record. However, the vast majority of payment break loans did not show explicit signs of vulnerability prior to the pandemic.

When considering the product types used by all firms, the FSN takes into account payment break rates by product type with leasing (25.6%), term loans (21.7%), and hire purchase (21.5%) products having a large share of outstanding balances. These three products make up the overwhelming majority, 95%, of payment break balances.

The FSN shows that 65% of SME payment break balances are secured. Of the €3.3bn that are secured, commercial real estate is by far the most common collateral asset. 52% of Large Corporate payment break balances are also secured, with commercial real estate being the main asset.

Notes

• “COVID-19 payment breaks on residential mortgages” uses loan-level data from the five major retail banks to assess characteristics of mortgages with COVID-19 payment breaks.
• “Which firms took COVID-19 payment breaks?” uses loan level data from AIB, Bank of Ireland and Ulster Bank since, as major sources of debt finance for Irish firms, they account for 98% (72%) of the outstanding credit owed by non-financial Irish resident SMEs (Large Corporates) to Irish registered banks as of March 2020.
• Payment breaks applied to 67,000 owner-occupier mortgages, accounting for over fifty thousand households, as many households hold more than one mortgage account.
• ‘Performing loans’ are loans and debt securities that are not past-due and without risk of non-repayment and performing off-balance sheet items.
• ‘Current forbearance’ refers to a situation where a restructuring or change to the terms of the mortgage contract is currently in place.
• ‘Borrower engagement’ refers to instances where borrowers have contacted their lender and completed a Standard Financial Statement form with a view to alleviating financial distress.
• Dear CEO Letter - Central Bank's Expectations for Payment Breaks in Banks and Other Lenders, 8 June 2020, can be read here.
• The series of Financial Stability Notes can be reviewed here.
• The Central Bank COVID-19 Consumer FAQs can be read here, SME FAQs can be read here and Regulated Firms FAQs can be read here.
• A Central Bank Explainer video on Payment Breaks can be viewed here.