Turned down for mortgage top-up yet offered personal loan at double interest rate

Hi all,

We would appreciate members feedback on the following situation we are going through.
We bought a house last year which needs considerable renovation. We have a small mortgage on it as the bank would only lend us a small amount as our incomes are relatively low. We have no other loans and have an excellent credit rating. We are currently renting and the house will be our primary residence once it is completed. When the work is completed the house will be worth more than double what it is now.

We have about half the money ourselves to do the renovations and so applied to the bank for a mortgage top-up for the rest - 40k. Following a very positive 2 hour meeting where the person from the bank said repeatedly "I don't see any problem with this" we have now been told that they won't lend us any amount of money on the mortgage top-up. However they will lend us the same amount - 40k -on a personal loan rate - double the interest rate of the mortgage. So instead of paying an extra e220 pm for the mortgage top-up it will be e530pm.
The standard reasons have been given for not giving us the mortgage top-up - it didn't meet the stress test with an extra 2% - and that the mortgage loan is secured against the property where as the personal loan isn't stress tested or secured.

We feel this is a blatant profiteering measure from the bank. Over the past several months we have fielded several calls and emails from them where we feel they have been trying to push us into the personal loan but we have insisted on the mortgage top-up. We are aware that over the term of the personal loan we will pay less interest but from a monthly point of view it does not suit us to pay that much in addition to the mortgage - we are already paying an equivalent amount in rent and want to lessen our outgoings.

Our questions are:
has anyone else experienced this situation of being turned down for a mortgage top-up yet being offered a personal loan for the same amount of money at double the rate?
have we any redress to complain about this or is it standard practice?

Thanks in advance.

You'l probably need to provide more info for a better answer, incomes, value of the property, size of the existing mortgage.

Hi amberley

It could be a result of stress testing that they are not allowed to give you a mortgage. It would seem crazy that the stress tests result in them not being able to lend you at 4%, but then they are allowed to lend you at 8%. I don't think it's blatant profiteering as you suggest. I think it's a response to CB rules.

Is it possible for you to switch lender?

In addition to the information suggested by pete, can you tell us which lender it is.

Brendan

Hi Pete and Brendan,

Thanks for your replies so far.

Some more info - our income combined is about e35,000 pa but that fluctuates as I'm self employed. We bought the property for e90,000 and the mortgage was e64,500 of which about e63,000 is remaining. The lender is Ulster Bank. We feel the house will be worth e200,000 when renovated.

I can't imagine we can switch lender now as the house is not habitable - its a shell as we have had to gut it in order to renovate. Also UB were the only lender who would approve us for the mortgage at the time in 2014 - even though we had previously had a mortgage with PTSB for e150,000 which we overpaid every month from 2003-2008 and then paid back in full when we sold our previous house.

Yes it seems from their answer that it is the result of stress testing that they cannot give us the mortgage top up - however this makes no sense in the real world as our mortgage is e368pm and with the additional mortgage top up would have been e600pm in total aprox. With the personal loan we would be paying e893pm. Thats over e3500 more pa. We are paying rent e800pm. It is galling to say that we cant afford the lower mortgage rate yet can afford the higher personal loan one. We feel that this is bad financial advice.

Our ultimate aim when buying the house was to reduce our monthly outgoings so we could start putting some money towards pensions, etc. Thats why we obviously want to avoid the higher rate - as anyone would. Advice greatly appreciated.

Thanks.

Sounds like you need a good project manager so that he can identify what can be done for the money you do have at the moment. Hopefully it's enough to live in one room of the house and then just do the other bits one by one as you save on the months rent you currently pay. Things like a kitchen and painting/decorating of rooms are not essentials. Also re-value the house after the initial work done and you may have a case for re-mortgage.

amberley said:

We feel the house will be worth e200,000 when renovated.

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This is not a relevant point for the purposes of your query. In the event of a LTV issue on the current value of the property the bank can require a new value on the basis of renovations being completed. Any valuer will only apply a value on the basis of structural changes i.e. extension/expansion rather than re-décor which are very subjective in value added.
While the refusal and approval of personal facility is frustrating this is likely to relate to the restrictions in mortgage lending rather than in any profiteering issue (i.e. personal loans of up to c50K can be approved far more simply than mortgage top-ups).
You have been refused the new loan so you have no option but to accept this decision. Best option now is to approach a broker or other lender with a proposal for the full funds required.

Could you take the personal loan now, use the money to do the renovations and once complete have the house valued and re-mortgage/topup/consolidate at that stage, clearing the personal loan. Short term pain no doubt but would it get you to where to want to be in the long term? perhaps to LTV is also an issue at the moment.

Hi Amberley

This is a very tough one.

On a combined salary of €35k, you are paying the repayments on a €63,500 mortgage and rent.
On a combined salary of €35k, you were able to overpay a mortgage of €150,000.

Yet, UB won't give you a mortgage of €103k, because you don't meet the stress tests.

Let's look at the numbers:



If I were a lender, making a "common sense" decision and not subject to Central Bank guidelines, I would feel that you were a good credit risk. I would be concerned about your ability to meet the repayments when interest rates rise. However, I would insist that you take out a 7 year fix on most of the loan. That means that you would be paying a lower rate than you are now and that you would be insulated from rate rises for the next 7 years at least. I would allow you keep €20k on a variable rate, so that you could overpay your mortgage without penalty.

I suspect that Ulster Bank has no discretion here at all. If they were to break their rules, the Central Bank would go after them. If you were to get into trouble with your mortgage, you would blame UB for irresponsible lending.

Did you not think of this when you bought the house?
Presumably you bought the house knowing that there was a lot of work to do? You probably underestimated the cost. And is there a danger that you are still underestimating the cost?

Can you increase your incomes in any way?

amberley said:

our mortgage is e368pm and with the additional mortgage top up would have been e600pm in total aprox. With the personal loan we would be paying e893pm.

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I find it hard to see how a couple can live on a combined income of €35k, pay a mortgage and pay rent. I don't think you can afford to pay €893 a month.

You are self-employed. Can you get a full time paye job anywhere? It should boost your income. You may only have to do it for a few years to qualify for the higher mortgage. After you draw down the mortgage, you could go back to self-employment.

In the mean-time, you could spend the €40k doing what is necessary on the house.

The very high mortgage rates in Ireland are contributing to your problem
You are paying 3.8% or 3.9%. The average new business variable rate across the eurozone is 2%. You have an ok Loan to Value, but a high Loan to Income multiple. You should probably be paying around 2.5%. This would allow you borrow more.

What you should do...
Proceed with the loan application for the personal loan and get the money to finish the house.
See if it's possible to cut the cost of the renovation.
You will really struggle with the repayments but you absolutely can't allow any arrears whatsoever as you may need to switch lenders later
Apply for permanent jobs or higher paying jobs
Don't fix your mortgage rate, as you may be able to switch lenders in the future
At a later stage, re-mortgage or get a top-up to replace the expensive loan.

You must prepare yourself for the possibility that you may have to sell the house if the repayments are too much of a burden.