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Dan White: The misery of an interest-only loan

I bought a house in 2005 for €460,000. I got a mortgage from Bank of Scotland for €224,000 with the balance coming from the sale of an apartment which I had previously owned.

The term of my mortgage is 30 years and I am on a variable tracker rate. I have so far been paying interest-only. I originally thought that the interest-only period was for three years.

However, when I spoke to Bank Of Scotland they said that there is no fixed term on interest-only but that when I do change to repaying capital as well I will not be able to revert to interest-only. Should I start to repay the capital, or leave it for another two or three years?

I am a single parent working in the public sector. My salary has been reduced to around €30,000.

Lisa

Lisa is now facing a very serious dilemma. Since she wrote to me Bank of Scotland (Ireland) has announced that it is closing its Irish branch network, which has operated under the Halifax brand name in recent years.

According to Halifax: "Your mortgage will continue under its existing terms as normal until it is paid off or you decide to switch to another financial provider".

This means that Lisa can stay put if she wishes.

Given that she is on a variable tracker rate, with her interest rate capped at a fixed margin over the official ECB rate that would be by far the most sensible thing for her to do.

Switching from interest-only to repaying the principal outstanding on her mortgage would normally be a no-brainer.

The problem with an interest-only mortgage is that you are making no inroads on the amount originally borrowed.

Lisa still owes the €224,000 that she borrowed five years ago. If she had been repaying principal she would have repaid over €26,000 of her mortgage by now.

The problem is that if she does switch to repaying principal she will be confronting a monthly repayment of about €885 as against her current €466.

And that's before interest rates start rising some time later this year.

Meanwhile, the collapse in house prices is eating away the equity which came from selling her original apartment.

Under normal circumstances I would advise Lisa to meet her lender and work out some sort of an arrangement.

Unfortunately, her lender will be gone by the end of May. She needs to contact them as soon as possible anyway but before she does so she should also arrange to meet her local Money Advice and Budgeting Service (MABS).

Unfortunately Lisa has very few options and none of them are pleasant.



I spoke to the manager of my local Ulster Bank and he advised me to put €10,000 into their 'secure bonds'.

These bonds pay apparently attractive interest rates.

Would my money be better off in these Ulster Bank 'secure bonds' or would I be better off putting my money into either Post Office savings certificates or bonds?

Josephine

When looking at the Ulster Bank bonds it is important to realise that while your capital is secure, your return isn't.

With these products, between 60pc and 100pc of your money is invested in a tracker bond whose returns are tied to a share index.

If the stock market goes belly up, something that has been known to happen from time to time, then you can kiss any returns good-bye and will only get back your original investment when the term expires.

As if this wasn't bad enough any interest that you receive will be liable for DIRT at 25pc while any returns from the tracker bond will be hit for 28pc tax.

Compare this to the guaranteed 21pc DIRT-free which you will receive if you hold savings certificates for five-and-a-half years and the 10pc (also DIRT-free) that savings bonds pay out after three years.

No contest.


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