It's four years since the recession gripped Ireland, plunging a generation into negative equity and unsustainable debt. Almost 130,000 homeowners are now struggling to repay their mortgage. With unemployment rife, the plight of these homeowners is unlikely to get any easier any time soon.
Lenders are now starting to offer new products to those who will be in mortgage arrears for the long haul. These products include split mortgages, trade-down mortgages and mortgage-to-rent schemes. But could they be just another chapter to your unending financial nightmare?
With a split mortgage, your mortgage is split in two parts: an affordable part which you repay, and the balance – which is parked.
With the affordable part of the mortgage, you repay the capital (the original amount borrowed for that portion of the loan) as well as mortgage interest.
You don't have to repay the parked loan until your affordable mortgage is paid off – unless your financial circumstances improve before then.
You may have to pay interest on the parked part of your loan, depending on your lender.
AIB and EBS don't charge interest on the parked part of a split mortgage. But Bank of Ireland does and Permanent TSB also plans to do so. A spokeswoman for Permanent TSB said its split-mortgage plan "is in development at this stage". "It is expected that a nominal rate of interest will apply on the warehoused portion of the mortgage," added the spokeswoman.
Split mortgages will be "pointless" if lenders charge interest on the parked loans, warned Paul Joyce, a senior policy researcher with the Free Legal Advice Centre who was on the debt review group appointed by the late Brian Lenihan a couple of years ago.
"If interest is waived on the parked loan, there may be merit in split mortgages," said Joyce. "But if interest is charged, you will face a sizeable interest payment down the line – on top of the principal payment which still has to be repaid."
Michael Dowling, of the mortgage brokers' network, the Independent Mortgage Advisers Federation, agrees. "Charging interest on the parked part of the mortgage defeats the purpose of parking the loan," said Dowling.
For example, let's say you've run into difficulty repaying a 30-year mortgage of €300,000 which has an interest rate of 5 per cent. Under that rate, if you park €150,000 of that loan under a split mortgage, the interest on that loan could be €4,500 a year.
If you opt for a split mortgage, it is likely that your lender will review your situation every few years to see if you can afford to repay more of the parked loan. If this is the case, your lender will transfer some of the money owed on the parked loan into the affordable mortgage.
The main drawback of split mortgages is that they "kick the can down the road", according to Joyce. That is, when you eventually repay the affordable part of the mortgage (which for most people, will be around retirement), you will still have to clear the parked loan. You might do this by selling your home and repaying the parked loan, trading down to a smaller property, or using other assets such as pension lump sums to repay the loan.
You might also offer your lender a stake in your home in return for it writing off some of your debt – but doing this would mean sharing any profit with the bank should you or your estate sell the property.
Split mortgages will not be offered to everyone. You must be in arrears to get one and you can only get a split mortgage for your home – not for an investment property. With AIB and EBS, you must also be in negative equity. The main advantage of split mortgages is that you can stay in your home.
However, if your financial situation doesn't improve significantly over time, you may never own your home as you're unlikely to be able to clear the parked loan.
If you're in negative equity and are struggling to repay your mortgage, your lender may offer you a negative-equity mortgage where you trade down to a less expensive home. These mortgages allow you to sell your home and carry over whatever debt is left on your previous mortgage to the new loan.
Among those already offering negative equity mortgages are AIB, EBS and Bank of Ireland.
Tread carefully with negative-equity mortgages however as you can end up with a hefty debt burden. You can borrow up to 175 per cent of what your new home is worth – which includes the debt carried over from your previous home. However, if you get a reasonable price for your existing home when you sell it, you may end up with a more manageable mortgage if you trade down with a negative equity mortgage.
MORTGAGE TO RENT
If you have no chance of ever clearing your mortgage – but don't want to lose your home, the Government's mortgage-to-rent scheme could be an option. With this scheme, you voluntarily give up your home to your lender. Your lender then immediately sells the property to a housing association – which then rents it to you.
The main drawback of this scheme is that you no longer own your home – although you continue to live in it as a social housing tenant. To qualify for the mortgage-to-rent scheme, your local authority must have approved you for social housing support.
Your lender must also agree that you have no chance of repaying your mortgage now or in the future. Another condition of the scheme is that if you live in Dublin, the current market value of your property must be less than €220,000 – or less than €180,000 if you live outside Dublin. Your household income must not be more than €25,000, €30,000 or €35,000, depending on the number of children you have. If your financial circumstances improve, you have the option to buy back your home.
Almost 80,000 homeowners have already missed at least three months' mortgage repayments. Many of these have no hope of ever repaying their mortgage – or qualifying for the Government's mortgage-to-rent scheme. They also have no hope of qualifying for any of the latest products offered by lenders to those in long-term mortgage arrears.
"The elephant in the room in the whole area of mortgage arrears is debt writedown," said Joyce. "A number of mortgages are unlikely to survive and will have to have some sort of writedown."
If you have no chance of ever repaying your mortgage, your only option may be the nuclear button – that is, sell up and move out of your home even if the sale proceeds won't clear your mortgage. You will have to get your bank's permission to sell, but if you can do so, you may be able to come to a personal insolvency arrangement with your bank for any outstanding loan.
Under the Personal Insolvency Bill you can cut a deal with your bank to repay unsecured debt of up to €3m over six years. You can also write off unsecured debts of up to €20,000 after three years.