Case study Advice Please

Income details
Net monthly (after tax) Income self: €3950 (full time employment)
Income history: Salary was reduced significantly/savagely
Net monthly income partner/spouse: Nil / was self-employed, business dried up
Amount of child benefit received: Nil
Amount of Mortgage Interest Supplement received: Nil

Personal circumstances so we can calculate your reasonable living expenses
Two adult family
Use public transport (got rid of the car to save money)
No children, no TV, cut back to the bone

Home loan
Lender: BoI
Amount outstanding: €514k
Value of home: €550k
Interest rate: SVR 4%
Monthly repayment: on interest only: €1,700
Amount in arrears: 0

Investment property -
Lender: BoI
Amount outstanding: €181k
Value of home: €120k
Interest rate: €120k on Tracker +1% (i.e. 1.05%), €61k on equity release 5% SVR
Monthly repayment: making full payment - €995
Amount in arrears: 0
Monthly rent received: €700

Other loans and creditors –
Credit Card - amount outstanding: €10k
Credit Card - monthly amount you are paying: €300

Other savings and investments
none left

Do you expect any lump sums in the medium term future?
No

How important is retaining the family home to you?
Very important. We broke our necks to trade up which we did at the top of the market (naturally!). We couldn’t face going back to our starter home (and it would require us to buy a car as it is not near public transport and we have no money to do that).

Summary of discussions and agreements with the bank
In MARP since mid-2012. Have been on interest only since then on Primary Residence, made all payments, zero arrears. Making full payments on the investment property. However, now bank have insisted that we move off interest only on primary residence, saying “interest only is not sustainable” (why interest only on a positive equity property is not sustainable they would not explain).

Bank has proposed split mortgages for 2 years only on both primary and investment property –
€120k on “special” 2.05% VR - 60%:40% split payment
€61k on 5% SVR - 60%:40% split payment
€514k on 4% SVR - 60%:40% split payment
Plus we have asked for a loan for Credit Card outstanding

Our concerns –
Overall it means increasing our monthly payments. We are ok with increased payments but it is dependent on wife finding work (actively looking) - we can’t pay extra before this happens. Bank have set an arbitrary deadline (the acceptance of this offer) but we have no more money so if she doesn’t get work straightaway we will be in arrears immediately.

Secondly our suspicion is that the bank is only focussed on taking the tracker off us. We’re making full payments and didn’t want that mortgage restructured.

Thirdly our concern is that after the 2 years the rates will have increased and/or they will apply the prevailing SVR rate to the investment property (i.e. 4+% up from 2.05%) and we will be in a worse position (because where we once had €120k on ECB +1% we now have €120k on whatever SVR they decide will apply to us) and because 60% of the capital is parked we would not have made any inroads into the negative equity on the investment property. Currently as we are making full payments we are reducing the amount outstanding each month (Original mortgage was taken out in 1999 so we have started to eat into the capital, equity release was done in 2007).

Which of the following best describes your situation?
I really want to keep the family home even if it means having a large mortgage. Couldn’t care less about the investment property - I’d drop it in a heartbeat if I could, but it is in negative equity.

Any other relevant information
Wife is actively looking for work. I am optimistic (but this is far from certain) that I will get a modest salary bump in 2015.

What is your preferred realistic outcome?
Stay on interest only on primary residence for 2 more years. If not we sell primary residence, the house is currently in positive equity.

Questions
1. is interest-only for an additional period realistic?
2. Am I not a profitable customer when paying interest only at SVR?
3. is it practical for us to hold onto our primary residence?

Does anyone have a view as to whether the banks do or do not view interest-only as sustainable or unsustainable?

Thanks

iconic said:

Does anyone have a view as to whether the banks do or do not view interest-only as sustainable or unsustainable?

Thanks

Click to expand...

In my case with BOI, I was told that interest only, which we could afford, was not a sustainable option.

Brendan posted something a while back that the central bank took the view that interest only was sustainable... Perhaps you could dig that out & quote it back to them?

The term sustainability in respect of MARP means that the loan repayments must be making a significant impact on the principle in order to clear the loan over an acceptabel timeframe. banks differ in terms of what they regard as a sustainable repayment level but a common factor used by many is a 5% repayment. i.e. the loan can be deemed sustainable where the borrower can meet an annual repayment equivalent to 5% of the outstanding amount. In your case that would require an annual payment of 27.5k or €2,292 monthly. Interest only is never regarded as a sustainable solution under MARP (Central Bank). You are currently meeting full repayments on the BTL loan which should not be your priority. At best you should be meeting IO on this facility as you are prioritising retention of your PDH. based on your current financial circumstances you are overborrowed and unless you can increase income in the short term you will need to make certain decisions on property disposal. BoI have given you options as required by them under MARP. You will need to make a decision on what option you intend to go with. You can appeal the Bank's offer but you will need better grounds for an appeal than wishing to retain the IO option. If the appeal is declined by the bank and you remain uncooperative you will receive a letter exiting you from MARP. The Bank can then take whatever action it deems necessary to protect its position. This can include reposession.

Thanks for the input.

I was somehow hoping that I could use the BTL to negotiate away as part of a deal - but I suppose that is not likely to be a runner?

We are not in arrears currently, but by prioritising our PDH we could easily be on the BTL as there is absolutely no breathing room for us at all and I don't know whether that is any way a better situation?

44brendan said:

banks differ in terms of what they regard as a sustainable repayment level but a common factor used by many is a 5% repayment. i.e. the loan can be deemed sustainable where the borrower can meet an annual repayment equivalent to 5% of the outstanding amount.

Click to expand...

Makes sense, though why nobody in the bank (that I was dealing with anyway) could tell me this seems a bit strange..

Is your income above (€3950) inclusive of the rental income?

iconic said:

How important is retaining the family home to you?
Very important. We broke our necks to trade up which we did at the top of the market (naturally!). We couldn’t face going back to our starter home (and it would require us to buy a car as it is not near public transport and we have no money to do that).

Click to expand...

So you'd rather live in penury than try and live reasonably and start again? Why?

Credit Card

Applying for a loan will not solve your cc problem, it will wipe it for now, and then you'll probably build it up again. (Note is particularly taken of the equity release when giving this advice). I'd be really really curious as to the banks reaction when you asked for a bank loan on this?

Income & Expenditure

Income: €3950
Mortgage: €1700
Investment:€295 - minimum
CC: €300

Leaves 2295 to live on for public transport, repairs, insurance, utilities food etc. A detailed breakdown of these costs are required, presumably you already have these to hand as the bank will have asked for it with a SFS. (standard financial statement)

Investment:

I wonder how much this is actually costing you, can you give us an idea of the annual interest on the two loans on this. I imagine with the tracker you are paying tax in addition to 'subsidising' the mortgage.

Solution:

Others have replied to your query on the banks offer. I suggest the following. Sell the house, yes it's your dream property, you'll get another one. You'll achieve about 30K with which to buy a car and pay off the CC debt.

Immediately you've also freed up

705 (1700 - 995) current mortgage versus investment
295 the amount you are servicing the investment
300 amount currently going on cc debt.

Total: 1300 a month. (and it will be more as you will save on the costs of a presumably large house). And what price financial peace of mind. I have not factored in the annual car cost.

This is a total non brainer to me.

Bank slave

You want the house, then be prepared to be always the banks slave, they have you over a barrell. Warning: temporary solutions from banks might appear to suit you, but always beware, they, the banks, are not in your best interest, you need to make sure it is in your best interest. Until you give us concrete figures for all the bank is proposing it's impossible to properly analyse. But I'd be wary of 2 year offers. They could have a nasty sting later.

Good news:

So that you are not disheartned. If you live in the investemtn for a couple of years, you save about 15K a year. You are well able to afford 1K now in mortgage, but are really able to afford about 2K monthly, if your wife gets work, you will be able to trade up.

I can't really dispute Bronte's advice. However, what you do have going for you is the potential to increase your combined income from future spouse employment. She would need to be capable of earning a good salary for you both to support a >500k mortgage. I'm assuming you have no plans to start a family as this would be likely to throw any budget out of kilter!!
Immediate focus should be on the BTL loan and the CC debt. No bank will lend you funds to pay it off. However you should approach the CC company to strike a deal on a structured payment either interest free ot at low interest. This will involve cutting up the card, but this would be a small price to pay.
In the medium term re-think your strategy on the PDH. Its' an enormus debt burden to carry at an SVR!! Trading down will give you some leeway and improve quality of life which in my view is essential!
You are the decision makers and you need to sit down and make these decisions together in full knowledge of all of the consequences!

Bank of Ireland are one of the better banks to deal with, quite pragmatic really. I would offer this proposal.

To put your main residence on interest only + part capital payments and at the same time put your investment property on interest only payments for an agreed period (the difference between capital and interest payment to your IHL and the interest only on your IHL been applied to your principal private residence as the part capital payment.

Payments wise, you are in exactly the same position, but you have bought time for your wife to find employment.

From the banks perspective, there has been movement on your principal private residence situation and you are now paying interest and some capital payments. In relation to your BTL you are looking for temporary forbearance and this property is secured by your main residence. ( again emphasise this point, if this is the case ).

So long as you emphasise to the bank that the arrangement is temporary and that the housing market is rising, they may agree to same. The best way to make this proposal is to meet with the banks in person and have your figures prepared.

Be careful that if they do accept your offer that you return to your tracker rate on the BTL property when the agreement terminates.

If the gap closes on the negative equity on the investment loan to say 30,000 euro, tell the bank you are amenable to selling the property at a loss and adding the loss onto the capital payments on your ppl. This will show the bank that you are quite pragmatic as well.