Solutions to mortgage arrears stack up in favour of the banks
THE €24bn mortgage arrears timebomb is ticking fast. So much so that panic has reached the upper echelons of power.
It emerged last week that the government wants the Central Bank to put more pressure on banks to tackle the mortgage arrears problem – where one in five homeowners are now struggling to repay their mortgage. This came barely a week after the Central Bank warned that banks were not doing enough to tackle the "long-term nature" of the mortgage arrears problem.
Last November, some lenders started to roll out new products for those who are in mortgage arrears for the longhaul. Since then, more lenders have followed suit. But many of these so-called solutions are unworkable and costly – and leave homeowners carrying the can for negative equity.
With negative equity trade-down mortgages, you trade-down to a less expensive home – and carry over whatever debt is left on your previous mortgage to your new home.
As the name implies, you must be in negative equity to qualify for one of these mortgages.
AIB, Bank of Ireland and EBS Building Society have been offering negative equity trade-down mortgages since last November. Danske Bank and PTSB also offer them now while KBC Bank has offered trade-down mortgages to customers who have "specifically requested" them.
With AIB and EBS, you can borrow up to 175 per cent of what your new house is worth – including the debt carried over from your previous home.
A spokeswoman for Bank of Ireland said the maximum amount which could be borrowed under its trade-down mortgage came down to "affordability" rather than loan-to-value ratio (the percentage of the price of a home that is borrowed). Danske Bank and Permanent TSB said that trade-down mortgages were negotiated on a "case-by-case" basis.
Michael Dowling, managing director of Dublin financial advisors, Abacus Finance, believes the only trade-down mortgages that are any use are those offered by AIB and EBS.
"Some other lenders are offering loan-to-value ratios of up to 125 per cent. That doesn't work in a market where property prices have fallen by between 55 and 60 per cent," says Dowling.
Tread carefully before taking on a mortgage equivalent to 175 per cent of the value of your new home – as this is one hell of a debt to shoulder.
You could also have an uphill battle getting a trade-down mortgage. "To qualify for a 175 per cent mortgage in the current climate, you'll have to be on a huge salary and have no other debts," said Dowling.
If you need to move to another house to accommodate a growing family, negative equity trade-down mortgages may make sense.
However, as you must sell your previous home to get a trade-down mortgage from your bank, you'll have to carry over any debt that's left on your previous mortgage into your new loan. This means you're taking all of the pain for the negative equity that built up on your previous home – rather than getting your bank to share some of the flack.
With a split mortgage, your mortgage is split in two parts: an affordable part which you repay, and the balance – which is parked. Unlike trade-down mortgages, split mortgages allow you to stay in your home.
AIB, Bank of Ireland and EBS Building Society became the first to offer split mortgages last November. Since then, Danske Bank and Permanent TSB have started to offer these mortgages. KBC is currently testing split mortgages.
Split mortgages only work if interest is not charged on the parked part of the loan, according to Karl Deeter, compliance manager with Irish Mortgage Brokers. "Banks which apply interest on the parked part of a loan negate the whole point of the exercise," said Deeter.
The only banks that don't charge interest on the parked part of a split mortgage are AIB and EBS. With Bank of Ireland and Danske Bank, the interest charged on the parked loan is the same as the interest rate on your main mortgage. Permanent TSB charges 1 per cent interest on the parked loan.
"In broad terms, parking a part of the loan – where interest is not being applied – is probably a good long-term forbearance option," said Deeter. "Obviously there will be a problem down the road as part of the debt never gets eaten away."
Permanent TSB offers debt-for-equity to those in mortgage arrears. With debt-for-equity, Permo buys a portion of your property based on the current market price of your home – and reduces the amount you owe on your mortgage by that amount. Should your financial circumstances improve, you can buy some or all of this portion back from the bank – based on the market price of your home at the time.
The advantages of debt-for-equity are that it allows you to stay in your home – and it should also leave you with a more manageable mortgage. However, as the bank buys a portion of your home based on current market prices, you'll have to take the hit for some of the negative equity in your home. The bank will also have the upper hand if the property market picks up. Should you decide to buy back the part of your home you sold to your bank – and your property is worth more at that time than when you opted for debt-for-equity – you will pay more to buy back this portion than your bank paid you for it.
MORTGAGE TO RENT
If you're on a low income and in dire straits with your mortgage, but want to stay in your home, the Government's mortgage-to-rent scheme could be your only option. With this scheme, you voluntarily give up your home to your lender. Your bank then sells your home to a house association, which rents it to you.
As your household income cannot be more than €35,000 to qualify for this scheme, many people won't get it. Take-up of this scheme has also been incredibly low because many of those who applied for it have been turned down.
Furthermore, if you opt for mortgage-to-rent, you will have nothing to show for any mortgage repayments you paid before you gave up your home.
GOING ON YOUR OWN
If you have built up mortgage arrears, you will have to take steps to clear those arrears – or you'll face penalties from your bank. However, apart from split mortgages, few of the "solutions" offered by the banks to those in long-term mortgage arrears allow homeowners to avoid carrying the can for negative equity.
If you're in negative equity and stuck with a mortgage you can't manage, it may make more sense for you financially to rent out your home – and either move in with your family (if this is an option) or move to another property which you rent yourself.
By doing so, the rent you earn should cover your mortgage repayments – and you can postpone selling your home until the property market, hopefully, recovers. If you go down this route, be prepared for the tax bill on rental income.
Banks have largely tried to dodge the bullet on mortgage write-downs, where they write off some of the debt on a mortgage.
"The banks have already written off substantial amounts of debt on corporate and commercial loans," said Dowling. "Yet mortgage debt is not being written off. In some cases, however, it will have to be."
Under the new Personal Insolvency Bill, if you're struggling with your mortgage, you may be able to get some of your debts written off. Although the State's personal insolvency service under this bill isn't expected to be up and running until this autumn, it could be worth your while holding off until then to see if you can strike a debt deal under the new law. Under the 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.