EBS 100% Mortgage - Booking Deposit through GE Money

This is an important question and illustrates some interesting points.
FTB jumped to conclusions based on a misunderstanding of the position.
He used language which I consider defamatory and had to remove.
If you read just the first post, you may have a negative view of the companies involved.
If you read the entire thread, it looks as if he got good advice and a good product

Brendan Burgess
Administrator
askaboutmoney.com




I hope someone can advise me inappropriate and defamatory comment removed - Brendan .... my predicament is as follows...

I have just purchased a house, taking out a 100% mortgage with EBS, arranged by the broker REA. This was the mortage which suited myself and my partner best based on our circumstances at the time.

We paid 5k upfront out of our own pockets and needed to pay a further 15k booking deposit within 21 days. EBS do not fund this themselves - GE Money do on their behalf. I was sceptical of taking out this loan as I knew there would be additional costs involved, but having spoken to REA who assured us the interest owed would be nominal (and being under time pressure to get the 15k to the builder), we applied and took the loan in May of this year. It was a 15k loan over 5 years - I've made 4 installments of 310eur and we must pay it off in full with the mortgage cheque proceeds.

I was blown away to discover I now owe 14,324eur.... having thought I would only owe 15,000 less (4 * 310.00) = 13,759.00 + a small bit of interest for the amount of time the loan was open.

I am being told that they use "the rule of 78" - I hadnt heard of this at the time.

Further defamatory comments removedAs it stands, Im being asked to pay 623eur in interest for a 4 month loan !!!! Im paying interest on the same money twice.... on the short term loan and on the mortgage amount.

Please advise what I should do - has anyone else been in this situation?

Bridging is expensive-€623 interest for 4 months doesn't sound excessive to be honest, based on what I paid recently.

I think you are mistaken to believe that you are paying interest twice.

You borrow €200,000 over 30 years, paybale from the date of drawdown.
You have also borrowed €15,000 over 4 months. In effect two separate loans-the total amount borrowed remains the same-all you have done is replace the bridging finance with a mortgage.

The 'rule of 78' is explained [broken link removed]. I'm not sure if this is common/accepted practice, or if there is anything to stop GE Money from charging interest in this way-the [broken link removed] or the Financial Regulator may be able to clarify.

That sounds like far too much to have paid in only 4 months. That certainly is not 'nominal'. I have a car loan with UB for €18,000 over 5 years and I only paid 240 interest in the first 4 months. €623 is way over the top for 4 months. Multiply that by 3 and that's almost €2k a year x 5 years is €10k interest on a €15k loan.

Now, granted, I don't know what this 'rule of 78' is all about, but whatever it is, it sounds like it's something GE Money purposefully use for these short term 'bridge' loans knowing full well they are usually paid back in a few months.

EDIT...

Multiply that by 3 and that's almost €2k a year x 5 years is €10k interest on a €15k loan.

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Ok, so my calculations are way off but I don't like the fact that EBS would pass you on to someone who will charge so much. Having said that, banks are there to make money so obviously they'll find the way that gets most out of you for those 4 months!

I presume this is a similar rule they use for mortgages as well, as the first few years is always interest?

Never heard of the "rule of 78" before and a quick Google throws up some interesting stuff on it including the fact that many US states have banned it as a way of calculating interest/penalties on early redemptions.

I had certainly heard of it before, possibly on a finance course, maybe in relation to leasing.

I don't understand why you took out a 5 year loan for 15,00 if you were just using it for bridging until the mortgage cheque was issued and if they knew you were going to be paying back the loan before the 5 years and still used Rule 78 without explaining the consequences, then you may have a case for complaint.

Thank you all for your replies.

Would you not consider Im paying interest twice?

House Price = 330k
Short Term Loan = 15k -> Interest = 623eur to date
... and now my Im paying interest on my 100% mortgage of 330k

Sunny said:

I don't understand why you took out a 5 year loan for 15,00 if you were just using it for bridging until the mortgage cheque was issued and if they knew you were going to be paying back the loan before the 5 years and still used Rule 78 without explaining the consequences, then you may have a case for complaint.

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...this was what was recommended to us... to paraphrase REA "the loan has to be at an arbitrary amount of time as the completion date of the house is unknown"...

It was always going to be between 4 - 6 months though....

FTB2006 said:

Would you not consider Im paying interest twice?

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No. You had a €15k loan for 4 months. You paid €632 interest.

You then borrowed 100% of the purchase price over X years (not X years plus 4 months).

You pay interest twice because you have borrowed twice-this is not the same as paying interest twice on the same loan.

FTB2006 said:

...this was what was recommended to us... to paraphrase REA "the loan has to be at an arbitrary amount of time as the completion date of the house is unknown"...

It was always going to be between 4 - 6 months though....

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Wow. And for GE to then use the rule of 78 means that they knew they were screwing you from the beginning. You should contact the ombudsman. Not sure if there is anything that can be done but it doesn't sound fair especially if it has been banned in certain US states. Interesting to see how many other people this has affected

There have been complaints with regard to GE money on the forum before. Do a search. At the very least, everything should have been explained to you in detail by REA and EBS.

'Rule of 78' is the standard settlement calculation used by the finance houses (inc GE) in Ireland. It is used particularly for car finance (HP) settlements and usually includes a fixed month penalty interest . The FSA in The UK have in the past couple of years instructed finance houses there to stop using this method and instead use the more consumer friendly and fairer 'actuarial' method. The Financial Regulator here does not instruct any bank or finance house to use any particular settlement method only that the settlement figure must give a reduction to the customer (in theory though that could only have to be €1!)

now my Im paying interest on my 100% mortgage of 330k

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no your not paying for it twice, as your not actually paying the 100% mortgage yet, you will be paying for it when it draws down, and you will be repaying the GE bridging finance from the mortgage cheque. you will be replacing the GE bridging with the mortgage. The misunderstanding is probably that you thought the repayments on the GE loan will come off the mortgage principle, but they dont.

I have not heard of any lender using rule 78 since the 80's ....were the repayments on the bridging loan not detailed to you at all by REA, EBS or GE, did you receive any correspondance confirming the interest rate and repayments. ?

I have never had the basis of any interest calculation explained to me unless I asked specifically.

I have received bridging twice before and I was informed of the actual (estimated) interest payable before I drew down the finance.

P.S. comparing bridging with a car loan is a non-runner-on a car loan you make payments-wrt to bridging, no repayments are made on the capital borrowed and the interest rolls up until the end of the term.

Sure, I realise they are two completely different products, but I was comparing the two only to highlight the difference in the amount of interest paid, purely to point out what a normal loan would cost so as to provide a basis for evaluating the bridging loan.

But I know what you mean.

What I am wondering is what pointed you in the direction of EBS. Shane Ross has written very concisely on the EBS 'mutuality' and that they have consistently higher mortgage margins compared to most high street banks. It seems to me that the mechanism that EBS use to offload the 100% mortgage is not very mutual either.

It was interesting but has been temporarily "suspended".

It is interesting from another perspective because 100% mortgages/ 10% deposit situations raise issues for the lenders. Mostly with a mortgage, its less than 100% and only kicks in when the title is passing to the mortgagor. So the mortgagor ( borrower) is securing the mortgage by passing full title to the lender. That of course is not the case with a 10% deposit coming from the lender - it is unsecured to some extent - as a practising solicitor, I would be wary about the extent of any undertaking I can give to a lender at deposit stage. Things can and do go wrong.

mf

FTB

At the AGM, I criticized the board of the EBS for choosing GE Money as a partner. It was mainly in relation to their very aggressive policies towards borrowers in arrears. I was assured personally at the AGM and subsequently that they have a code of conduct in place for GE Money to treat EBS borrowers.

EBS must recommend product to you which suits your needs.
Rea must also recommend a product to you which suits your needs.

In general, I have a high opinion of both the EBS and Rea and I suspect that you might not fully understand the situation or that you may have been misinformed when you asked what the balance outstanding was. Nowhere, have you mentioned the APR of the loan? What APR is on the loan? As CC has pointed out, bridging is expensive. If they told you upfront that the interest rate was 12%, then that would be fine. expensive, but fine. If they did not disclose the APR or the early repayment penalties, then I assume that they would be in breach of the Consumer Credit Act.

It would be inappropriate to sell you a 5 year loan with an early repayment penalty for a loan which was going to last 4 to 6 months.

Please provide the following information:
What apr were you advised of up-front? Check the GE Money documentation.
Were you advised that there would be early repayment penalties? Check the documentation again?
Have you actually paid off the loan at this stage? Have you drawn down your mortgage? When you repay the loan, provide the following information:
Date loan drawn down:
Number of repayments
Amount of repayments
Final amount outstanding:

A lot of people do not understand financial products. The fact that you mistakenly believe that you are paying interest twice on the loan suggests that you might well be mistaken in your understanding of other aspects of the loan. That is why it is very annoying for me to see you making defamatory comments based on very few facts.

Brendan

I drew this thread to the attention of GE Money who responded as follows:

these facilities are variable rate loans with fixed repayments. These are intended as a short term facility though customers have a choice of selecting from 1-5 year terms which impacts on the level of capital repaid during the bridging period. It appears from the details on askaboutmoney that the customer chose the longest term keeping their repayments to a minimum. Rule of 78 doesn't apply to these contracts. Based on the details provided, the APR appears to have been 9.2%. When the mortgage is drawn down, customers are given a settlement figure without penalty and they are given 14 days to repay it.

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Brendan

Brendan,

Thank you for your posts so far.

I have no experience of settling Variable rate loans. GE are saying the balance outstanding is €14,382; am I correct in assuming the "settlement amount" should be less than this? Is it likely to be much less?

Best Regards,
FTB