In a period of low interest rates, lengthening loan periods and interest-only loans for a period, have become popular in both the commercial and residential loan markets.

The Central Bank reported last month that Irish residential mortgage lending continued to expand at a rapid pace in January, when the year on-year growth rate (adjusted for securitisations) reached a new record high of 28.8%, up from 28.5 per cent in December 2005. The traditional January effect was evident, as the monthly increase fell to €1.5 billion from the record €3.5 billion in December. However, January 2006 saw the highest increase to be recorded during the first month of a year, showing a strong start to residential mortgage lending in 2006.

With the exception of AIB Bank, all Irish lenders are providing 100% mortgages and many also provide interest-only loans.

The Central Bank has advised Finfacts that it does not require lenders to provide data on interest-only loans.

In recent years, more than 75 per cent of Bank of Ireland investment customers have availed of the bank's ten-year interest-only mortgage, according to Bank of Ireland Mortgages Manager Olive Moran.

"It's very attractive as it enables investors to defer capital repayments for the first ten years," Moran told the Sunday Business Post. "They can then spread the capital repayments over the remaining period of up to 15 years. Alternatively, if they have access to a lump sum from a personal pension policy, they can use these funds to repay the outstanding capital."

Last year, the US, BusinessWeek magazine obtained the first-ever measurement by metro area of the increasing popularity of interest-only mortgages, and it showed that San Diego rates No. 1, by number of "IOs" in 2004. In metro San Diego, 47.3% of all mortgages required interest payments only in their early years. The survey covered the top 50 metro areas in the US and measured by the total number of mortgages issued. Atlanta, San Francisco, Denver, and Oakland, Calif., followed close behind San Diego. Milwaukee turned in the lowest number, just 4.8% interest-only loans last year.

The Economist also noted in 2005 that interest-only mortgages are all the rage, along with so-called “negative amortisation loans” (the buyer pays less than the interest due and the unpaid principal and interest is added on to the loan). After an initial period, payments surge as principal repayment kicks in. The Economist said that in California, over 60% of all new mortgages in 2005 were interest-only or negative-amortisation, up from 8% in 2002. The national figure is one-third.

Interest-only mortgages accounted for less than 2% of all US loans as recently as 2001.

In February, Moody's Investors Service Inc., which rates and monitors commercial mortgages that are packaged and issued as bonds, said in a report that the commercial-mortgage market is showing two disturbing trends. Loan-to-value ratios, which measure the amount of a loan in relation to its market value, and debt-service coverage ratios, which measure the monthly amount the borrower pays in relation to the property's cash flow, are carrying more risks than they ever have before.

Moody's had said in 2005 that 65% of the US commercial loans that it rated in the second quarter of 2005, were interest-only for part or all of the loan's term.

"People are borrowing an amount equal to what the property was worth five years ago," says Tad Philipp, Moody's managing director of commercial-mortgage finance and the study's lead author. "It's reached a point where we're no longer comfortable."

US commercial-mortgage loans had increased to 15% of the gross domestic product as of the third quarter of 2005. That level hadn't been scaled since the peak of the nation's last commercial real-estate cycle, in 1988.