Interest only mortgage maturing next year - no means to repay it.

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Nadyden

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Hi, I’m looking for some advice on behalf of my parents who took out an interest only mortgage in 2008 to invest in a high risk foreign property investment that never materialised. The term is due to expire in sept 2025 (corrected from initial post) , when they will both be 75. The issue is that the interest rate tracks the ECB rate and my parents are now now faced with their mortgage payment trebling from €300 to over €1,000 p.m while only receiving state pensions. The repayments are approx 50% of their monthly income. They have never been in arrears before. but simply cannot afford a repayment of €1,000 per month. What is the likelihood of Pepper offering a settlement to clear the loan? My parents have no other assets or source of income. So I would be considering refinancing my home to try to pay down the capital. The loan value is €350K and property value is approx €450 - €500K. I have approx €200K of equity in my home.
Would any consideration be given to the fact that they were sold a mortgage on their primary residence that would mature after retirement? They also don’t want to sell their home when the mortgage matures, as there wouldn’t be enough equity left to buy another property in Kildare and they obviously won’t get a mortgage. TIA
 
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It sounds Nadyden that you currently have a mortgage so are planning to take out another mortgage of €200K to give to your parents to pay some of the debt they will owe €350K next September, plus any arrears they will have built up. Your €200K leaves them €150K short. I can’t see it working unless you have other siblings, can you afford the repayments?

They basically have been renting for €300 a month for the last 15 years so they have a very good run of it. What has their plan been to pay off the mortgage?

What if they sell the house, clear their debt and then use the €150K to add a granny flat to your house. They can pay you rent etc.
 
Nadyden said:
They also don’t want to sell their home when the mortgage matures, as there wouldn’t be enough equity left to buy another property in Kildare and they obviously won’t get a mortgage. TIA
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How much is their home worth? What would be left if they sold and paid off the €350k loan? Could they buy another place, maybe with your/family help, with the balance? They might need to be flexible on location if the budget isn't enough for their preferred location. Could they rent for the rest of their independent years with the balance?
 
What's the situation with the foreign property? Are there any assets there?
Do they have a pension from working that they can access?
Would they consider renting a room?
Personally i think you remortgaging to pay off a lump sum leaving 150k loan is a bad idea. Being honest, why would a lender even agree to this?
Could your parents sell the property and gift you the proceeds and you could purchase a one or two bed property and allow them live there? There may be tax implications if they pay below market rent which youd need to determine.
Alternatively they could sell up and relocate to a more rural location where they might be able to purchase a small property.
 
dubdub123 said:
i think you remortgaging to pay off a lump sum leaving 150k loan is a bad idea.
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It is one of these bad ideas which just turns out to be the best of the bad ideas out there.

It's not as bad an idea as seeing your parents homeless.

But before doing it, you need to make sure that they don't repossess the property anyway.

And such loans are often forgotten and when your parents die, your siblings say that it was a gift and you end up in the High Court. So if you do lend money to your parents, make sure that your solicitor draws up a formal mortgage document which says that your loan must be repaid when the house is sold.

They should also make it absolutely clear in their will that the house is to be sold and the loan repaid.

Brendan
 
dubdub123 said:
What's the situation with the foreign property? Are there any assets there?
Do they have a pension from working that they can access?
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It doesn’t look like anything will come from the foreign investment. The fund were relying on the land being zoned for residential and it never happened because of the crash, so it’s valued as agri land now. They held out hope for years it would materialise, but it’s unlikely they’ll ever get their money back. My dad was a self employed carpenter with no pension, my mam had a contributory pension, but it’s not much more than the state. They unfortunately just got really bad advice and now have to suffer the consequences.
 
Definitely lots to consider. There are 5 children, so ideally the burden would be shared, but honestly I’m not sure the others are prepared to do so. But that’s their prerogative and I wouldn’t force it/hold it against them.
 
Hi all,

Just to provide an update on this situation, firstly i incorrectly advised earlier that the capital of the loan was due to be paid back in 2023. The date is actually September 2025. My parents engaged a financial advisor to engage with Pepper on their behalf to see if they would agree to a reduced payment, as payments have increased to €1,600 per month due to ECB interest increases. My parents submitted all of their affordability information to Pepper and their response was essentially that my parents cannot afford any sort of payment plan and they provided a number of options to them including selling the home outright or sale and lease back from Pepper. My parents also met with a Personal insolvency practitioner who said that because there is equity in the home, Pepper would not agree to any sort of arrangement other than paying the €1,600 payment per month, as the house can simply be sold to pay back the capital. So as it stands, they are making the repayments with what savings they had and help from family and the only option for my parents is to sell the family home and hope there is enough equity to buy something else. (Having considered it further, I have decided it’s unfair on my own family to burden us with an extra mortgage to purchase to home, so this is no longer on the table).

I don’t think we have any other option but to sell the house.

Thanks for all the input on this.
ND
 
That is a more realistic outcome Nadyden. It is probably in your parents best financial interest to sell as quickly as possible, because their savings are being eroded with the €1600 a month interest repayment. A daunting task given their age.

Any of their children consider a granny flat idea for them to live in? With only €150K equity after sale they will not be able to afford to buy much. If they rented a home at €2K per month their money would be gone in 6 years. But there are some 1-2 bedroom apartments for sale in Kildare for less than €150K so there is opportunities for them to purchase a home with their money.

Best of luck to them, they had a mix of fortune down through the years, some to their benefit, some against but it has led them to this point in their lives.
 
Nadyden said:
and they provided a number of options to them including selling the home outright or sale and lease back from Pepper.
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What were the terms of the leaseback offer?

If they were offered an affordable rent they would have protection of rent increase caps currently 2% pa.
 
Let's say that the house is worth €500k in Sept 2025. (It could be worth more or less)
The mortgage balance is €350k
They will be 77 years old.



Option 1: You and/or your siblings borrow €350k and clear the mortgage.
The advantages of this:
  • Your parents retain their home
  • The interest rate would be comparatively low
The disadvantages:
  • Having such a big loan might limit your own plans e.g. to trade up
Option 2: Borrow €150k from Spry

At age 77, Spry finance will lend them 32% of the value of the property or €150k.
If one of you borrows €200k and reduces the mortgage to €150k, then they can borrow the €150k from Spry. Spry is looking at another product which will lend them more than 32% if they pay the interest for the first 5 or 10 years. That may well be available by September 2025.

The advantage here is that your parents keep their home.

The disadvantages are
  • The interest rate would be much higher than you would pay if you borrow yourself.
  • There is a risk that the loan + rolled up interest could wipe out all the equity in the home leaving the person who borrowed €200k with nothing to show for it.
They can pay the interest on the loan to stop it rolling up. And if the family gets more money, they can pay down the Spry Loan.

Option 3 You buy the home from them and lease it back to them

So they sell the house to you and you buy it with a buy to let loan of €350k and a loan from them of €150k

They pay you rent to cover the interest so you have no tax liability.

This protects you as you now own the house so your siblings can't argue about it after your parents die.

The repayments on €350k over 15 years at 6% would be €3,000 a month.
The interest element would be €1,750 so you are paying off capital of €1,250 a month.
You might be able to get a longer term than 15 years.

Option 3A,B,C

You could buy the house from them for €350k. But this might create problems down the line when you go to sell it as the purchase price for CGT purposes would be lower than the market value.

You could buy the house from them and not charge them rent. Then any gain might be exempt from CGT as you are providing a house to a dependent relative. Need to check if elderly parents meet the criteria of this scheme. On the whole, I think it's better that they refund you the interest as rent.


Option 4 Trade down

They will have €150k after selling the house.
That won't buy them anything in Kildare.
But they could gift the €150k to you
You buy an investment property for €400k so you are borrowing €250k

Option 5 Do nothing
When the loan term expires, just keep paying the interest.
Pepper will probably write snotty letters but they will probably be happy enough just collecting the interest.
This could be stressful for your elderly parents but if none of the other options are available, this may be the last resort.
 
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My parents were in somewhat of a similar situation with Pepper some years back, long term interest only (ex. NIB ECB +0.5%) loan of just under €0.5m. Luckily they had just over half that amount in cash savings at end of 15 year term interest only term & then I lent them the c. other half as a loan by taking out mortgage (via broker) on our house . Formal loan agreement in place between parents and me and security over one of their investment properties. Difference here is that they could have sold other assets to pay back this Pepper loan , but was actually more efficient to me to give them a loan on our house as the annual interest & principal repayments on our loan to them was a rematch small % of their post tax annual income
 
Hi Clamball, a granny flat is a possible option for them. My older brother and sisters have houses on decent sized sites so they may be prepared to build a granny flat for them (subject to planning) and at least they will have the equity as their retirement pot. Thanks for the advice.
 

Hi Brendan, thank you so much for setting out these options. I think I will need to seek financial advice to explore some of these options further (e.g so that I am not inadvertently creating a CGT issue for myself in the future). So, I will start looking into this.
In your opinion, what is the likelihood of Pepper getting a repossession order if my parents just continued to pay the interest (although it’s highly unlikely they would choose this route due to the stress)?
 

First of all, Pepper would have to decide to take legal action. My gut feeling is that they wouldn't bother as long as they are getting the interest every month.

If they do go down this route, it would take them at least 5 years to get an order for possession.

There would be repeated adjournments. Pepper would not have their paperwork in order. The court would repeatedly tell them to try to reach an agreement.

The other options are better but if the other options are closed to them, then this would be the only option.

Clearly you do not want Pepper to get such an order as it would result in a much reduced selling price. So after about 5 years your parents would agree to sell it voluntarily.

Brendan
 
Under this option would Pepper have any grounds to seek a higher interest rate, or would they have to continue to honour the tracker margin.
 
cremeegg said:
Under this option would Pepper have any grounds to seek a higher interest rate, or would they have to continue to honour the tracker margin.
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I don't know. My understanding is that the practice of the lenders has been to extend the rate they were on.

But that has not been expensive because most interest-only mortgages are trackers and they are higher now than other loans.
 
How are a couple earning €2305 a month paying €1600 in mortgage interest? That leaves them living on €162 Euro a week.
 
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