High Court explains compound interest to property investors

Brendan Burgess

Brendan Burgess

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www.irishtimes.com

Couple set to lose three buy-to-let properties after repaying €950,000 on initial €1.12m loan

Judge has ‘considerable sympathy’ for couple who still owe €1.4m under loan facility
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This “would be unjust for the reasons of having spent all of our income to retain the properties for our old age and retirement”, the borrower said. “In succinct language we borrowed €1.15m. We have repaid €950,000. Our current balance is circa €1.4m. Had we placed our money into a pension scheme we would be in a far better position.”

In her witness statement, Ms McKenny said “it appears that all our repayments since 2007 are in effect useless if this application succeeds”.

The mathematics of applying an interest rate of 5.41 per cent on a large sum over a long period means paying back “a multiple” of the amount owed, the Judge said.
 
Oh no, what a tragedy. Made best efforts, all in vain.

Rent freeze & COVID - Aaargh!
 
The facility letter clearly stated the amount of credit advanced was €1.127 million but, on foot of that, the “total amount repayable” was €2.252 million. The cost of the credit was €1.125 million, the difference between the two amounts.
...
During most of the years since the facility issued, the couple were unable to meet the repayments, even when they were interest only, the judge said. Monthly interest-only repayments were some €5,562 in 2015 and rose to some €10,000 from 2020.
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Sounds more like bad business management than a problem with compound interest rates to me.
 
I assume they either missed payments or went to interest only for a period.

It is sad that the judge basically says they would have been better off to just stop making repayments.
 
Brendan Burgess said:
It's both bad investment and the failure to understand compound interest.

I have seen this time and time again. "I borrowed €300k 20 years ago. I have repaid €200k but I still owe €200k!"

Brendan
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There seems to be a real hesitation by some to accept that there is a cost involved with finance. That what one pays back is significantly more than what they have borrowed.
 
2007/08 property crash, reduction in rents, loss of tenants, the Covid-19 pandemic and one of them losing employment.

- property crash didn't affect anything, either the borrowings made sense or they didn't.
- I've never seen such a period of stability in the rental market as now, certainly from 2010
- rental growth has been phenomenal, how did covid affect rents?
- losing employment is a big blow for sure, but that means the rents were not covering the mortgages, and never did, so it was a bad financial mistake buying them in the first place (and at the height of the market one assumes)

The judge is giving out the wrong signals. If you're borrowing at this level you can't be claiming crazy stuff like you'd have been better off putting the money into pensions. They could have bought badly into pensions. And with what money exactly.

Borrowing 1.1 million you should have your wits about you. This means it was a mistake from the get go:

During most of the years since the facility issued, the couple were unable to meet the repayments, even when they were interest only,

There is still a degree of dissonance, if she thinks the money should have gone into a pension instead of paying the mortgage I'm assuming she means the rental income that was coming in to go out and pay the loan.

This is why some out there think it's ok not to pay back what you borrow,

The fact they were not strategic defaulters was illustrated by them always using whatever rent they got to pay off the mortgage every month and continuing to pay off their loan obligations even after a receiver was appointed over the properties by Pepper in late 2021, he said.

Literally getting praise for paying back your loan.

The worst bit is this:

The couple, he said, could have sold the properties in 2016 when it was estimated the sale would have discharged the entire loan but Ms McKenny indicated they wished to hold on to them at that time.
 
Bronte said:
The couple, he said, could have sold the properties in 2016 when it was estimated the sale would have discharged the entire loan but Ms McKenny indicated they wished to hold on to them at that time.
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But prices have increased by around 50% since 2016. They must have been on a very high interest rate for compounding to wipe out that capital gain.
 
Bronte said:
- property crash didn't affect anything, either the borrowings made sense or they didn't.
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Bronte said:
The couple, he said, could have sold the properties in 2016 when it was estimated the sale would have discharged the entire loan but Ms McKenny indicated they wished to hold on to them at that time.
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This is the key point. If the property crash had not happened, they could have sold their properties and repaid their loans.

But it is clear that they did not want to clear the loans when they could have done.

I have no sympathy for them.

Brendan
 
Harvard said:
There seems to be a real hesitation by some to accept that there is a cost involved with finance. That what one pays back is significantly more than what they have borrowed.
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People have no idea. Ask anyone to tell you to the nearest 50k or 100k how much interest they'll pay overall on their mortgage and almost no one will be able to tell you. People don't know how much they pay for their houses.

Additionally not only will you pay back more than you borrowed, but it's feasible with rates no longer being low that the interest payments alone will total more than the amount borrowed.

That Irish people, who are often financially illiterate, choose huge investments with a lot of leverage as the default investment option seems nuts to me.
 
Purple said:
But prices have increased by around 50% since 2016. They must have been on a very high interest rate for compounding to wipe out that capital gain.
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As usual in the reporting we only get half of the story. I don't believe a word of it that they didn't understand interest. It's shocking they didn't sell in 2016 when they could have.
 
DazedInPontoon said:
People have no idea. Ask anyone to tell you to the nearest 50k or 100k how much interest they'll pay overall on their mortgage and almost no one will be able to tell you. People don't know how much they pay for their houses.

Additionally not only will you pay back more than you borrowed, but it's feasible with rates no longer being low that the interest payments alone will total more than the amount borrowed.

That Irish people, who are often financially illiterate, choose huge investments with a lot of leverage as the default investment option seems nuts to me.
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Do people borrowing not get an amortisation table, don't brokers do it up for their clients. At any given moment on my home loan I can log into my banking online and see how much more I've to pay in capital and interest monthly.
 
Brendan Burgess said:
This is the key point. If the property crash had not happened, they could have sold their properties and repaid their loans.

But it is clear that they did not want to clear the loans when they could have done.

I have no sympathy for them.

Brendan
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I'd bet anything that even if there was no crash that none of this made any sense from the beginning. Probably borrowed way too much because the banks were giving it out like confetti and with very little money put up front by the borrowers.
 
5.41% at 2007 property prices was never going to make investment sense even if prices did not collapse.

Their error was looking for the finance in the first place.
 
Bronte said:
Do people borrowing not get an amortisation table, don't brokers do it up for their clients. At any given moment on my home loan I can log into my banking online and see how much more I've to pay in capital and interest monthly.
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On top of that the pmt function in excel is great for playing around with to see if what difference different rates or extra repayments make. It's a little bit advanced but if you know excel it's easy.

I've seen plenty of people who can't do maths complain that banks load the interest onto the start of the mortgage as if it's some kind of conspiracy :)
 
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qwerty5 said:
I've seen plenty of people who can't do maths complain that banks load the interest onto the start of the mortgage as if it's some kind of conspiracy
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Qwerty

Don't be surprised if you hear me say that on a radio programme some day. It's a great line.

Brendan
 
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peemac said:
5.41% at 2007 property prices was never going to make investment sense even if prices did not collapse.

Their error was looking for the finance in the first place.
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I'll agree with that. With the proviso there was outrageous bad banking going on as well. I was offered way more than I was looking for myself. My sibling was told they should be borrowing half a mil. Another took them up on it and landed in financial armageddon.

When you have desperate people trying to get on the property ladder, especially if young, or not financially experienced, and where the banks and brokers are telling you anything you desire is within reach, it's no wonder we had the celtic tiger madness.
 
qwerty5 said:
The amount of times you'd

On top of that the pmt function in excel is great for playing around with to see if what difference different rates or extra repayments make. It's a little bit advanced but if you know excel it's easy.

I've seen plenty of people who can't do maths complain that banks load the interest onto the start of the mortgage as if it's some kind of conspiracy :)
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I love excel, what's the pmt function?
 
DazedInPontoon said:
Additionally not only will you pay back more than you borrowed, but it's feasible with rates no longer being low that the interest payments alone will total more than the amount borrowed.
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The amount of interest paid over the lifetime or a mortgage is not terribly useful as no one knows for sure what inflation and future interest rates will be.

@Brendan Burgess has said a few times (and I fully agree with him) that the only relevant question is whether you are on the most advantageous rate available to you at any given time.
 
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