Case study Retired, Rented Properties Interest Only Mtg Ending

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silverstone

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I am in my late sixties and find myself in a bit of a financial predicament

I have my own home (Mortgage Free) and three rental properties

Rented Property One - Value €550 - Income €3k pm
Rented Property Two - Value €70 - Income €750 pm

Rented Property Three - Value €80k - Income 800 pm (Mortgage free)

The first two rented properties are attached to an interest only mortgage, currently 1.5%. the Mtg is €650k and repayments are just €820 pm

The difficulty is that the Interest only five year term ends next year (Summer 2013) and payments jump very high to approx €2,500 per month plus interest so using the current interest only figure, it is likely that the monthly repayments would be €3320 pm (Capital and interest payable over a 20 year term). I have looked at the figures and just cant see how I will be able to make the monthly repayments taking expenses into account.

My only other income is my state pension.

I would appreciate if anyone had any advice on the following questions

Is there any way that the bank would consider stretching out the interest only term in the hope that I can kick the can down the road a little bit when property prices increase so that I can pay them back and possibly have a little lump sum out of the sale of the two rental properties? Presumably my age (68) will not be favourable here?

How I should best approach the situation? I am afraid that if I go to the banks seeking an extension of the interest only they will just move to take the two properties off me?

If the sale of the two properties doesnt cover the mortgage that they are tied to, will I have to carry the debt if they go to take them or how will that work?
 
Let's start with your last question:

If the sale of the two properties doesnt cover the mortgage that they are tied to, will I have to carry the debt if they go to take them or how will that work?
Click to expand...
Yes. If you are left with a shortfall, you will have to pay off the shortfall through the sale of your other investment property or of your home. The bank will register a judgement against your home. You are taking a huge risk here with this property portfolio.

You have €700k of rental property and a mortgage of €650k.
How much is your home worth? Say it is worth €300k - you have total exposure to property of €1m.

Your only income is the state pension.

You are taking a massive risk that you will become insolvent

  • Property prices may fall
  • Interest rates may rise
  • Rents may fall
  • A tenant may refuse to pay
  • A one-off problem could hit any property making it unsaleable
You must reduce your properties and your borrowings.

You may be reluctant to do this as they have probably fallen in value since you bought them. But that is not the issue. If you sell your investment properties, you will be left with a mortgage free home and a state pension. You won't be wealthy, but you will be solvent.

If you keep the properties and some combination of the above risks emerges, then you could end up losing everything including your home.
 
Total repayments|€3320
Rent |€4,550
Surplus|€1,300
How are your costs, excluding tax, more than €1,300 per month?


Let's look at Rented Property 1

Annual Rent|€36,000|
Annual Interest| €8,000 |€550k @ 1.5%
Other costs|€2,000
Income tax|€13,000
Net profit|€13,000
Leaving the riskof a property price fall aside for the moment, this is a very profitable investment and it's a shame to get rid of it. The profit is due to the very cheap tracker.

If you sell the unmortgaged investment property, this will release cash to pay the capital repayments for a few years.

I think that the risk to your financial wellbeing is such that you should get rid of it. I don't think that the potential profit is worth the huge risk involved.
 
I would recommend the following approach.

1) Don't tell the bank that you face any difficulty - it will weaken your position.

2) Sell the unmortgaged investment property immediately. You will then have cash to meet the capital repayments and will be in a very flexible position and under no pressure in your dealings with the lender.

Make sure to keep this cash in a bank account other than with the mortgage lender. You do not want them to know your full hand.

3) Approach the lender and ask them for a 10% discount on the mortgage for selling it off and repaying the cheap tracker early. If it's Bank of Scotland, they may accept. It's unlikely that any other lender will accept, but they might.

4) If they refuse, offer to sell the smaller investment property in exchange for extending the interest-only period. They might go for this.

5) If they refuse this deal, then you should maybe sell the smaller mortgaged investment property anyway to reduce your risk.
 
One other option would be to sell your family home and move into one of the investment properties.

Is this an option? Would it be an option if things got really bad after a few years?
 
Thanks for the advice Brendan it makes for scary reading but the story is sadly scary!

My own home is worth approx €250K but the difficulty is that the rental property which is unmortgaged is on the same site and is accessed by the same gate so it would not be easy to sell it without alot of planning difficulties and cost in organising a separate entrance etc

In relation to my own home, I am currently housing family who also find themselves in a difficult financial situation so the house is full and my preferance would be not to move.

The Mortgage is with an Irish bank

Costs are high - Insurance is over €1k pa on the two mortgaged
NPPR €200 each
Household Charge - €100 each (this year!)
PRTB - €90 each letting
Mgmt fees on smaller prop (apt) is over €2k pa

Maintenance is always 2 to 3K each year.

The interest only is a Tracker so presumably by next year the interest will have jumped
 
Brendan Burgess said:
Let's look at Rented Property 1

Annual Rent|€36,000|
Annual Interest| €8,000 |€550k @ 1.5%
Other costs|€2,000
Income tax|€13,000
Net profit|€13,000
Leaving the riskof a property price fall aside for the moment, this is a very profitable investment and it's a shame to get rid of it. The profit is due to the very cheap tracker.
Click to expand...

I would actually suggest that rental property 2 is a better investment:

Annual Rent|€9,000|
Annual Interest| €1,050 |€70k @ 1.5%
Other costs|€1,000
Net profit|€6,950
For the amount of capital tied up, it is giving a far better return than property 1. It is bringing in quarter of the rent but the mortgage/value is only one-eighth that of property 1.

Selling property 1 and keeping property 2 would allow OP to avoid crystallising all of his losses but leave him with a more manageable exposure to the property market.
 
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