This is all the news now. I often think history repeats itself. When i worked in a bank many years ago the only way one could borrow was by overdraft. Then with great fanfare (and quite correctly) Term Loan/Loan facilities were introduced and most people with Overdraft had their facilities split into an overdraft limit and a term loan of up to 7 years. If repayment over 7 years was not evident it was put on a Loan account subject to yearly review. Extracting the hard core was the exercise involved. I suspect a similar plan is now being introduced for persons with mortgages they cannot service.
A split mortgage is just like converting an overdraft into a term loan
- Thread starter dewdrop
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Brendan Burgess
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Hi dewdrop
I don't think that the comparison is valid.
An overdraft was supposed to be a temporary facility which was supposed to be cleared to zero at least once a year. Many people operated them as term loans and so the banks changed them to term loans. But interest continued to be charged on the term loan and on the overdraft.
With AIB and ptsb, there is no interest being charged on the warehoused amount, so in effect, a split mortgage is a reduction in the interest rate being charged on the loan. As the interest rate is being reduced, this is effectively a form of debt write-off. (Bank of Ireland is charging the normal interest on the split part, so it's probably closer to your term loan/overdraft split)
Brendan
I don't think that the comparison is valid.
An overdraft was supposed to be a temporary facility which was supposed to be cleared to zero at least once a year. Many people operated them as term loans and so the banks changed them to term loans. But interest continued to be charged on the term loan and on the overdraft.
With AIB and ptsb, there is no interest being charged on the warehoused amount, so in effect, a split mortgage is a reduction in the interest rate being charged on the loan. As the interest rate is being reduced, this is effectively a form of debt write-off. (Bank of Ireland is charging the normal interest on the split part, so it's probably closer to your term loan/overdraft split)
Brendan
Thanks Brendan.. I appreciate the comparison is not really valid but in my early days in the bank overdrafts rarely went into credit during a year and it was really when term loan lending was introduced the concept of 3o days in credit for overdraft became a requirement. If an account did not achieve the 30 days the interest was then charged at the 1/3 term loan rate. Its all history now!
St. Bernard
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At ptsb they are charging 1% variable interest on the warehoused portion as far as i know.
SB
Danske are charging simple rather than compound interest on the warehoused portion of the split mortgage.
Which appears to me to be pointless.
Say you'd a mortgage of €300,000 and could afford to pay a €200,000 mortgage, so €100,000 was warehoused.
€100,000 warehoused over 25 years at 4.5% simple interest would leave a debt of €212,500 to be paid at the end.
€100,000 warehoused over 25 years at 1% compound interest would leave a debt of €136,478 to be paid at the end.
At the end of the 25 years you'd basically still be in the same position with Danske's option!
Which appears to me to be pointless.
Say you'd a mortgage of €300,000 and could afford to pay a €200,000 mortgage, so €100,000 was warehoused.
€100,000 warehoused over 25 years at 4.5% simple interest would leave a debt of €212,500 to be paid at the end.
€100,000 warehoused over 25 years at 1% compound interest would leave a debt of €136,478 to be paid at the end.
At the end of the 25 years you'd basically still be in the same position with Danske's option!
Brendan Burgess
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Eh, no. Simple interest over a very long term is a very valuable concession.
€100,000 @ 4.5% compound would be €300,543 after 25 years.
4.5% simple is around 3% compound, so the concession is worth around 1.5% a year on 1/3rd of the loan, so it's a reduction in the effective APR on the entire loan from 4.5% to 4%. Not bad.