May be about to go into arrears on family home; two BTLs

[meath man]

Brendan, taking your earlier advice I've attached the money makeover information here:

Personal details
Age: 55
Spouse’s/Partner's age: 49

Number and age of children: 2 children – both 18 years of age (both going to college in 2023)

Income and expenditure
Annual gross income from employment or profession: €170,000 (self-employed family business)
Annual gross income of spouse: included on above figure

Monthly take-home pay about: €8,500

Type of employment: e.g. Civil Servant, self-employed: self employed

In general are you:
(a) spending more than you earn, or Yes
(b) saving? nothing


Summary of Assets and Liabilities
Family home worth €900K with an €850K mortgage
Pension fund: €200K
2x Buy to Let Properties worth €750K with mortgages of €645k


Family home mortgage information
Lender: Pepper
Interest rate ECB+2%

Value: €900K

Mortgage: €850K

(No need to tell us the monthly repayments or what term is left)

Other borrowings – car loans/personal loans etc N/A
Do you pay off your full credit card balance each month? No
If not, what is the balance on your credit card? Circa €5k rolling

Car loan: €480 per month

Buy to let properties

Property 1

Value: €550k
Rental income per year: €22K
Rough annual expenses other than mortgage interest: €5K

Lender: Start Mortgages
Interest rate ECB +1%

Outstanding balance: €475K

Paying interest plus a tiny part of capital on this mortgage

If we were to sell this property at €550K today we would receive a net of €25K after paying the mortgage, costs of sale and CGT

Property 2
Value: €200k
Rental income per year: €10K
Rough annual expenses other than mortgage interest: €3K

Lender: Pepper
Interest rate ECB +1.25%

Outstanding balance: €175K

Paying interest plus part capital on this mortgage (paying €650 per month)

Notice given to tenant of this property, notice expires in June 2023. Potentially sell this property at that time. We need to sell for €205K to be able to pay off the mortgage and costs of sale and CGT.

Other savings and investments:

Do you have a pension scheme? Company that runs the family business is pay €1K per month into a pension
Savings = €45K (needed in case of emergency/illness as we both work in the family business and we need a cushion if one of us becomes ill)
Do you own any investment or other property? Yes please see above

Other information which might be relevant

Life insurance: €800K cover on oldest spouse, €500K cover on younger spouse, both terminating in 5 years time

One holiday per year.

No frivolous expenditure. Live like hermits. We simply don’t have the spare cash. We are the classic example of what people would outwardly see as ‘successful’ but we have a debt level that’s not sustainable.


What specific question do you have or what issues are of concern to you?

We’ve always known that the only way we will pay off the home mortgage will be to sell the house and trade down. We plan to do this in 5/6 years time when our children are hopefully self-funding and with a bit of luck the value of the home has increased sufficiently to give us some equity.

Now however with the increases in interest rates, our outgoings exceed our income and it will probably be like that for the next couple of years. We’ve done up an SFS for ourselves and it’s very clear to see.

Effectively the combination of the low interest rate environment in the last 8/10 years and paying interest-only on rental property #1 (rental income = €1,850, mortgage = €650, meant €1,200 ‘spare’ cash that effectively went towards paying our home mortgage) saved us.

We are self-employed in a labour intensive business and whilst we have a good income relative to lots of people we cannot continue to sustain that level of income as we get older so unlike most people we envisage our income reducing rather than increasing.

We are paying over 50% of our income on bank borrowings and it’s increasing.
In addition we’re paying interest and part capital on both BTL properties and we know it’s just a matter of time before they come knocking and looking for our plan.

What I’m wondering is this – has anyone had any experience of dealing with Pepper whereby they have a grown up conversation with them with a view to doing some deal that looks at the long term and not just the short term?

One thing were thinking about is whether Pepper would warehouse part of the home mortgage until the time we sell the house, as part of a coherent long term plan?

I tried to broach this with them before 3 years ago but to be honest I felt the people I was dealing with didn’t really understand what they were doing and either couldn’t or wouldn’t engage

 

[Zion2022]

Brendan, taking your earlier advice I've attached the money makeover information here:

Personal details
Age: 55
Spouse’s/Partner's age: 49

Number and age of children: 2 children – both 18 years of age (both going to college in 2023)

Income and expenditure
Annual gross income from employment or profession: €170,000 (self-employed family business)
Annual gross income of spouse: included on above figure

Monthly take-home pay about: €8,500

Type of employment: e.g. Civil Servant, self-employed: self employed

In general are you:
(a) spending more than you earn, or Yes
(b) saving? nothing


Summary of Assets and Liabilities
Family home worth €900K with an €850K mortgage
Pension fund: €200K
2x Buy to Let Properties worth €750K with mortgages of €645k


Family home mortgage information
Lender: Pepper
Interest rate ECB+2%

Value: €900K

Mortgage: €850K

(No need to tell us the monthly repayments or what term is left)

Other borrowings – car loans/personal loans etc N/A
Do you pay off your full credit card balance each month? No
If not, what is the balance on your credit card? Circa €5k rolling

Car loan: €480 per month

Buy to let properties

Property 1

Value: €550k
Rental income per year: €22K
Rough annual expenses other than mortgage interest: €5K

Lender: Start Mortgages
Interest rate ECB +1%

Outstanding balance: €475K

Paying interest plus a tiny part of capital on this mortgage

If we were to sell this property at €550K today we would receive a net of €25K after paying the mortgage, costs of sale and CGT

Property 2
Value: €200k
Rental income per year: €10K
Rough annual expenses other than mortgage interest: €3K

Lender: Pepper
Interest rate ECB +1.25%

Outstanding balance: €175K

Paying interest plus part capital on this mortgage (paying €650 per month)

Notice given to tenant of this property, notice expires in June 2023. Potentially sell this property at that time. We need to sell for €205K to be able to pay off the mortgage and costs of sale and CGT.

Other savings and investments:

Do you have a pension scheme? Company that runs the family business is pay €1K per month into a pension
Savings = €45K (needed in case of emergency/illness as we both work in the family business and we need a cushion if one of us becomes ill)
Do you own any investment or other property? Yes please see above

Other information which might be relevant

Life insurance: €800K cover on oldest spouse, €500K cover on younger spouse, both terminating in 5 years time

One holiday per year.

No frivolous expenditure. Live like hermits. We simply don’t have the spare cash. We are the classic example of what people would outwardly see as ‘successful’ but we have a debt level that’s not sustainable.


What specific question do you have or what issues are of concern to you?

We’ve always known that the only way we will pay off the home mortgage will be to sell the house and trade down. We plan to do this in 5/6 years time when our children are hopefully self-funding and with a bit of luck the value of the home has increased sufficiently to give us some equity.

Now however with the increases in interest rates, our outgoings exceed our income and it will probably be like that for the next couple of years. We’ve done up an SFS for ourselves and it’s very clear to see.

Effectively the combination of the low interest rate environment in the last 8/10 years and paying interest-only on rental property #1 (rental income = €1,850, mortgage = €650, meant €1,200 ‘spare’ cash that effectively went towards paying our home mortgage) saved us.

We are self-employed in a labour intensive business and whilst we have a good income relative to lots of people we cannot continue to sustain that level of income as we get older so unlike most people we envisage our income reducing rather than increasing.

We are paying over 50% of our income on bank borrowings and it’s increasing.
In addition we’re paying interest and part capital on both BTL properties and we know it’s just a matter of time before they come knocking and looking for our plan.

What I’m wondering is this – has anyone had any experience of dealing with Pepper whereby they have a grown up conversation with them with a view to doing some deal that looks at the long term and not just the short term?

One thing were thinking about is whether Pepper would warehouse part of the home mortgage until the time we sell the house, as part of a coherent long term plan?

I tried to broach this with them before 3 years ago but to be honest I felt the people I was dealing with didn’t really understand what they were doing and either couldn’t or wouldn’t engage

Difficult situation and agree with your assessment that trading down is realistically your only chance of clearing down PPR mortgage debt. You should probably look to do this sooner rather than later.

The main thing that jumps out at me is what terrible investments the two BTLs are. I assume you’re stuck in RPZs? Getting gross yields of only 4% and 5% is bananas. It’s extremely easy to pick up an 8% yield with rental properties at the moment.
Borrowing close to 100% of capital, soon to be paying 4/5% interest on said capital, and getting a gross yield of 4%/5% just makes no sense.
Assuming you can’t significantly up the rent, you should serve whatever notice you need to serve to sell these, today. Not sure if eviction ban precludes that, but essentially you need to sell those things at the earliest opportunity. They will bleed you dry and the pain will only get worse as ECB hikes further.

Even if you can increase rents, you should probably sell both anyway as you have wayyyyy too much exposure to Irish property.

Best of luck with it!

Edit: just on the car loan. This is a personal thing, but I wouldn’t underestimate the risk in your current situation. A very small drop in the value Irish property and you will be completely bankrupt, such is your level of leverage. Personally I wouldn’t be able to justify driving anything but a heap of scrap until I got my wider debt problem under control. €480 a month is extra pain you can’t afford right now.

 

[Brendan Burgess]

I am missing something here.

You have a great income -€170k.

But you have three big mortgages. You say you live like hermits. How come you still have such huge mortgages and so little equity in your homes? On top of that you have a car loan and a credit card loan effectively.

 

[Brendan Burgess]

credit card? Circa €5k rolling

Car loan: €480 per month

Savings = €45K

I understand that you get comfort from having €45k in the bank. But it's costing you a lot.

Clear your car loan and clear your credit card and then you can rebuild your savings after that.

Brendan

 

[Brendan Burgess]

ne thing were thinking about is whether Pepper would warehouse part of the home mortgage until the time we sell the house, as part of a coherent long term plan?

I tried to broach this with them before 3 years ago but to be honest I felt the people I was dealing with didn’t really understand what they were doing and either couldn’t or wouldn’t engage

No, they wouldn't.

Family home worth €900K with an €850K mortgage

You are close enough to negative equity already.

If they allow you to reduce your repayments, the chances of negative equity are much higher.

Brendan

 

[Brendan Burgess]

Annual gross income from employment or profession: €170,000 (self-employed family business)

Has the business a value?

When you retire, can you sell it?

Brendan

 

[Brendan Burgess]

@meath man

I would need to know the history to see how you got into this situation, as I suspect that there must be some other story.

I see three options for you, none of which is attractive

1) Sell the 2 investment properties

This was my first thought as you are overexposed to property. But on reflection, it does not solve your problem.

You will get a net of €50k

You will still have an unsustainable mortgage on the family home. You will eventually sell it and have equity of about €100k and own no property.

With €100k equity, you won't be able to buy a home.

2) Don't sell anything

This is a very risky option and a small drop in property values or further increases in interest rates, and you would be insolvent.

However, if property prices continue to rise, your equity will increase and just maybe you will eventually have enough equity from the three of them to buy one smaller house. Seems unlikely though.

3) Sell the family home and move into one of the investment properties.

This is the strategy which is most likely to leave you ending up owning your own home in retirement. I know you hate the thought of it, but I think it's one you need to give strong consideration to. If you sell your home and sell the second investment property, you will have a manageable mortgage.

The term may be up and Pepper may demand full repayment, but you can usually drag that out for years if you keep making substantial repayments. They may even be happy to leave you in it as long as you are paying the full interest.

Timing
I think you should get used to the idea that you will be moving into one of the investment properties eventually.

So keep the best one and maybe sell the other one.

You could try to hold off until the two kids are finished college. But that is very risky. A small fall in prices would scupper this plan.

Brendan

 

[Clamball]

Yeah I agree with Brendan, and I think you see it yourself, you are on the brink of having the house of cards come tumbling down.

ppr. Value 900K. Owe 850K. - Clear €50K
No 1. Value 550K Owe 475K. - Clear €25K
No 2. Value 200K. Owe 175K. - Clear -€5K

So can you sell you PPR and house no 2, move into house no 1? You will have €90K (your savings plus what you clear from selling 2 properties.). A lot may get eaten up in the move, but pay off the cc bill and the car loan and you will have only 1 loan to service on your €8500 income. Then focus on reducing your mortgage and increasing your pension pot.

I can’t see how talking to Pepper can help you, they sound like they have zero incentive to do so, if you go into arrears they would sell the asset to cover the loss.

I think you should aim at moving by next summer, the kids will be through the leaving and away to college, and if you start now you should be able to wrap it all up by summer. Instead of paying €4K a month to service all your loans you could then afford to pay €2K a month on paying back the mortgage. This will leave you with €2K a month to fund the kids through college and spend a little more on yourself

There probably is a whole back story on how you got into this position in the first place, but if you gain some breathing room you can start to focus on how to pay off the home loan before retirement.

 

[RichInSpirit]

Is your Net income figure right @ €102000?
In a self employed senario sometimes business and personal expenses can get a bit confused.

 

[Zion2022]

Yeah I agree with Brendan, and I think you see it yourself, you are on the brink of having the house of cards come tumbling down.

ppr. Value 900K. Owe 850K. - Clear €50K
No 1. Value 550K Owe 475K. - Clear €25K
No 2. Value 200K. Owe 175K. - Clear -€5K

So can you sell you PPR and house no 2, move into house no 1? You will have €90K (your savings plus what you clear from selling 2 properties.). A lot may get eaten up in the move, but pay off the cc bill and the car loan and you will have only 1 loan to service on your €8500 income. Then focus on reducing your mortgage and increasing your pension pot.

I can’t see how talking to Pepper can help you, they sound like they have zero incentive to do so, if you go into arrears they would sell the asset to cover the loss.

I think you should aim at moving by next summer, the kids will be through the leaving and away to college, and if you start now you should be able to wrap it all up by summer. Instead of paying €4K a month to service all your loans you could then afford to pay €2K a month on paying back the mortgage. This will leave you with €2K a month to fund the kids through college and spend a little more on yourself

There probably is a whole back story on how you got into this position in the first place, but if you gain some breathing room you can start to focus on how to pay off the home loan before retirement.

The chances of either BTL being the ‘right’ house for the OP and his family would be quite slim since they are essentially two random houses they happen to own.

Sure there are some cost savings to moving into an existing owned house (CGT, legal, stamp etc.) but given this is the OPs last move and family home possibly for the rest of his life, I’d be inclined to say sell all 3, take 90k of equity and buy a reasonable house in the 300-400k range that suits their needs.

The tracker mortgages are significantly less valuable now which I think further supports this.

 

[Brendan Burgess]

take 90k of equity and buy a reasonable house in the 300-400k range that suits their needs.

This would be correct if they could get a mortgage. But at 55 and 49 , I think it would be very difficult. (He says that he is paying some capital, so it sounds like a restructured mortgage. If so, they have no hope of getting a mortgage.)

The attraction of my approach, is that they have a mortgage already and at ECB +1%, it's not bad.

We don't know when it's term is up.

But your suggestion, Zion, is not incompatible with mine if done in the following order:


1) Sell the family home and Investment 2 at the same time.
2) Move into Investment 1 temporarily while looking for the final home.
3) Apply for a mortgage and see if it's possible to get the mortgage size you need.

 

[NoRegretsCoyote]

@meath man - I think you need to delveraage and deleverage fast (you know this yourself!). Interest are only going up short term. I won't speculate on house prices but you are at a point with valuations where you can get out out jail free essentially and that might not be the case in one year or five years or ten years. For me the downside of negative equity is far worse than the upside or more capital appreciation even if interest rates weren't rising.

2) Move into Investment 1 temporarily while looking for the final home.

I agree if BTL 1 is suitable to your needs it is by far the simplest option, it also has the cheapest tracker. Paying €4k a month for 12 years at even 3.5% will have the mortgage cleared if the business stays profitable. For me zero debt by 67 should be your out-and-out financial property. You don't want to be facing into retirement with any mortgage at all ideally.

I have zero first-hand knowledge of how Pepper would deal with you. The fact that you are cashflow positive, are in positive equity, and have a healthy non-rental income makes me think that won't entertain you at all.

 

[goingforgold]

You have 50k equity in your PPR and 105k equity in investment properties. You have 45k cask so 200k positive equity in total. If this was a situation where your house value was 400k with 200k mortgage then it wouldn't be a worrying situation.
Therefore sell the investment properties asap and trade down asap and live a far less stressful life. Get your house in order right now (so to speak)

 

[Brendan Burgess]

you are at a point with valuations where you can get out out jail free essentially and that might not be the case in one year or five years or ten years. For me the downside of negative equity is far worse than the upside or more capital appreciation even if interest rates weren't rising.

Coyote

In the very particular circumstances of this case, I don't think that this is correct.

If he does nothing, and house prices fall, he will lose all three properties eventually and have no home to live in.

If he deleverages, he will have no home to live in Ireland. So that is not too different from negative equity.

However, if house prices increase, he may have enough equity to buy a property.

 

[NoRegretsCoyote]

If he deleverages, he will have no home to live in Ireland. So that is not too different from negative equity.

I'm recommending that he sells PPR and property 2, move in to property 1 and pay down that mortgage as aggressively as possible.

I don't think he should leave himself with no property at his age.

 

[dubdub123]

You need to cut your cloth to suit your situation here..

How much is your car worth now and what loan is left on it? Its actually reckless to have 480pm loan repayments on a car when your financial situation appears to be so risky. Can you sell the car?? Use some savings to buy another and funnel those repayments elsewhere.

And what is the breakdown of your outgoings? You mention one family holiday per year - how much is this costing for 4 adults? That is not essential spending whatsoever and its not clear what the costs are. This could be anything from a weekend in Kerry to 2 weeks in the sun, so you need to look at this spending as part of overall budget and being honest having a nice family holiday yearly is not living like a hermit. There are plenty of people who sacrifice holidays in order to pay bills.

What else is being spent ? Your net income of 8500 doesnt stack up to living like a hermit whatsoever. You dont have high creche fees etc, so where is the remainder of income going? You really need to look at this closely.

Why are you holding 45k savings when you are paying high interest on credit card?

One recommendation here is to get in touch with a really good broker. Find out your options regarding the different scenarios above as that will drive your options. You may get a mortgage but term will be quite short due to age. My own mortgage goes to age 67 which is frightening but im hoping to overpay.

Also get estate agents in now to value each property in current market and see where things are at. If selling multiple properties through same agent and solicitor, push for a deal on fees.

For next year, will you be funding third level next year and is the plan for your children to live at home? Can they pick up summer/part time jobs outside of family business? If not living at home can you consider rent a room? Can they consider deferring for a year and work for that time? You might need to consider student grants though if going this route.

Would it be worthwhile for your spouse looking at employment outside of family business? Spread out the risk on this front..

You are in an enviable position with such a high level of income and while there are costs relating to college, low interest student loans can be looked into and your adult children take on that responsibility, so that you can focus on other areas. You have a number of options here but you may need to take some pain regarding car/holidays etc to get back on track and look at the options outlined by earlier posters regarding sale of assets.

This level of stress cant be good either and it will be stressful trying to assess the situation but the sooner you make decisions and act on them, you can move ahead.

 

[NoRegretsCoyote]

Rental income per year: €22K
Rough annual expenses other than mortgage interest: €5K

Rental income per year: €10K
Rough annual expenses other than mortgage interest: €3K

I don't really understand this part either. I don't see how insurance, LPT, maintenance, etc, are coming in at a quarter of gross rental income.

Are they apartments with big sinking funds? Do you have rents well below market rates?

 

[Zion2022]

This would be correct if they could get a mortgage. But at 55 and 49 , I think it would be very difficult. (He says that he is paying some capital, so it sounds like a restructured mortgage. If so, they have no hope of getting a mortgage.)

The attraction of my approach, is that they have a mortgage already and at ECB +1%, it's not bad.

We don't know when it's term is up.

But your suggestion, Zion, is not incompatible with mine if done in the following order:


1) Sell the family home and Investment 2 at the same time.
2) Move into Investment 1 temporarily while looking for the final home.
3) Apply for a mortgage and see if it's possible to get the mortgage size you need.

That’s a good point, I was thinking with a decent household income and 30-40% down, you’d get a loan of 2x income at least despite being a bit older - but you are probably right if poor credit history which seems likely .

Talking to a broker would be a wise next step.

OP, do you have any backstory for how you ended up in this situation and are you confident in your valuations?
Unless you bought all 3 properties in 06/07 or in the last few months, the loan to value ratios don’t make much sense.

 

[Scoobydoobydoo]

I agree that the primary focus is to keep a roof over the head....there is 200k sitting in a pension. Is it worth exploring to see if this could be accessed now?

 

[dubdub123]

I agree that the primary focus is to keep a roof over the head....there is 200k sitting in a pension. Is it worth exploring to see if this could be accessed now?

I think before going that route OP needs to look at other areas. op mentuined in other thread that they are spending 50% of income on mortgage repayments. Where is the other money going?
Why are they going on annual holidays? Why have a car loan of 480pm ? None of that jars with someone living like a hermit being honest..

OP has an extremely high net income but somehow got in over his head with 3 properties, blaming his lender for not taking a long term approach now, even though hes in his mid 50s.. and seems to have buried his head in the sand about the situation until the eleventh hour even thiugh interest rates were at a record all time low. He is also sitting on 45k and carry credit card debt.

He and his spouse would really need to consider all other options before pulling money out of pension. Its unclear if all this is all in his name or whether his spouse has a pension.