Key Post New AIB/EBS split mortgage may write off some debt up-front

[Brendan Burgess]

AIB has not issued any official release on the new product, so I have pulled this together from various sources.

Any AIB customer already offered a split will also be offered this new product. I suggest having some patience as this might take some time to get around to.

A key point to realise is that being offered a split mortgage is the very last stage before repossession. AIB will take the borrower through a series of measures, interest only and term extensions. If none of these provides a sustainable solution, they will see if a split mortgage will work. I would estimate that only around 10% of borrowers in arrears will be offered splits.

The decision on whether to offer a split mortgage and the terms of the split mortgage will depend on the repayment capacity of the borrower.

|Before split|After split|After 5 years |
House value|€200,000|€200,000 |€200,000| assuming no change in house prices
Main mortgage|€300,000|€220,000|€190,000| 4.5% interest
Term remaining|20 years|25 years|20 years
Repayments|€1,900|€1,200|€1,200
Split||€60,000| €57,000|0% interest
Immediate write down||€20,000
Total mortgage|€300,000|€280,000 |€247,000
Negative equity|€100,000|€80,000|€47,000

Notes
As part of the deal, the term is extended by 5 years ( My assumption for illustrative purposes)

AIB has calculated that this borrower can afford the repayments on a mortgage of €220,000 over 25 years. Other examples have shown a main mortgage of 80% of the open market value of the property. But the size of the main mortgage will be based on what the borrower can repay. The minimum amount will be 80% of the market value, but I would expect that in most cases, the main mortgage will be higher than the market value.

I don't know how the initial write off, if any, is determined.

If a borrower keeps up the repayments for 5 years, 5% of the warehouse will be written off. After a further 5 years, a further 5% will be written off.

So the mortgage will be reduced to €247,000 after 5 years, of which interest will be charged on only €190,000.

If house prices rise by around 4% a year for the next 5 years, the negative equity would be wiped out.
There is no review of the amount in the warehouse. If the borrower's repayment capacity improves, nothing will be moved from the warehouse to the main mortgage.

For every capital repayment of €7,000 in the first 5 years, €10,000 will be deducted from the warehouse.
For every capital repayment of €8,000 in the second 5 years, €10,000 will be deducted from the warehouse.

 

[Brendan Burgess]

Assessment

This split will give borrowers an incentive to continue paying their mortgage. I think it's generous enough for it to be far more attractive than voluntary surrender or bankruptcy.

If you are offered a split mortgage, you have to compare it to the alternative of voluntary sale, repossession and/or bankruptcy.

AIB is also doing deals where the mortgage is not sustainable. Borrowers are encouraged to sell their homes. AIB is the only bank which will do a deal on the shortfall before you agree to sell the property. The debt will not hang over you forever. If you can afford €200 per month, they will accept this for a period of years.


If you have a cheap tracker...

I have used a SVR of 4.5% in the above illustration. If you have a cheap tracker, your affordability will be higher, so you are probably going to get a lower write down or warehouse.

I think that split mortgages will be rare enough

Here are the figures which AIB gave to the Oireachtas Committee back in September

Split mortgages issued |153
Total offers to customers in arrears| 12,500
Legal letters |5,000

The 12,500 probably includes some offers of split mortgages which had not been accepted when these figures were issued, but splits make up a very small part of the overall solutions.

 

[Brendan Burgess]

How to maximise your chances of being offered a split mortgage.

AIB has to be confident that you will be able to meet your repayments.

1) Engage with AIB - submit your Standard Financial Statement - 30% of borrowers in arrears have not submitted any statement.

2) While the split is open to all customers, I would think that your chances will be improved if you go via The Irish Mortgage Holders Organisation. They will be give you independent advice on what you can reasonably expect from AIB.

3) Make sure that you make some meaningful payments on your mortgage every month, even if you can't afford the full repayments. If you have been paying €200 a month for the last year, AIB will not offer you a split mortgage based on a repayment of €800 a month.

4) Prioritise your mortgage repayments over your unsecured creditors. A split mortgage is a good alternative to insolvency. If you are insolvent, your credit union and credit card will get nothing anyway. You will be much better off burning them now, and keeping your home.

 

[Introuble83]

Brendan, regarding the above I was offered a split mortgage in December 13 for 52% active 48% warehoused. I accepted and sent back the forms. I received a letter last week advising the split has now happened. No mention of any write down. Would you suggust I go back to the bank and try negotiate? it took quite some time to get the deal in the first place. Dissapointing that they offered me the spilt, activated in 2 weeks ago and made no mention of this new scheme

 

[Brendan Burgess]

Apparently, anyone who has been offered a split under the old scheme, will qualify for the new scheme.

The key elements of the new scheme are
1) No review of the warehouse
2) A 5% writedown of the warehouse if you keep up your repayments on the main part for 5 years.
3) A further 5% writedown after 10 years.
4) An incentive to use lump sums to clear the warehouse.

The example used by IMHO showed a write off of €40k. This is not an integral part of the deal. You can't go back now and claim a right to a write off.

They will write to you in time and confirm the new incentives, but I doubt if they will revise the figures.

You could contact the IMHO AIB section to see what they advise.

 

[Brendan Burgess]

I have not seen any official release from AIB on the terms of their scheme, but I have been given a copy of an offer dated March 2014.

It's a 16 pager full of disclaimers and official warnings. I have attached the Key Extracts in the attached.