The Keane Report proposal on split mortgages

[Brendan Burgess]

I think that the report overall is good, but this is not a meaningful proposal.

The examples are particulary difficult to figure out, but this is their example, simplified.

|Total|Affordable|Warehouse
Mortgage today|170k|123k|47k
Capital repaid over 5 years|-10k|-10k|
Interest rolled up over 5 years|13k|-|13k
Balance at the end of 5 years|173k|113k|60k

Splitting a mortgage into two bits is meaningless. Paying capital off one bit while rolling up interest in excess of the capital repaid is meaningless. The only thing which matters is the combined figure. If you pay more than the interest charged each year, you reduce the amount outstanding. If you pay less than the interest charged each year, the amount outstanding increases.

The Deferred Interest Scheme is much simpler. It shows your capital remaining level + it shows you the amount of interest you have been charged but which you have not been able to pay.

They make the example even more complicated by assuming that the value of the house increases from €120k to €217k.

The right way to look at this is as follows:

A - The balance on your mortgage will rise if you don't pay off all your interest, and it will fall if you pay more than the interest.

B - The value of your house may change over time.

These are independent of each other. If both move in the right direction for you, your negative equity will be eliminated. If they both move in the wrong direction for you, your negative equity will increase.




It's really that simple.

 

[Jim2007]

When I first heard of the split mortgages I thought it was alone the Swiss lines, but from what I now understand it to be, I'd agree with you, it's all a bit mickey mouse!

Here in Switzerland, most mortgages are what is called split mortgages, but the meaning is different - the part you intend to pay off and the part you never intend to pay off

In Switzerland, home ownership is low, but when you do go to the bank for a mortgage the first things they will want to know is:

• The official valuation of the property as determeined by the local authorities
• Do you have the required 25% in hard cash as a result of savings or accumulation of assets other than gifts
• And the amount of the mortgague you do not intend to pay back.
• The length of the payback period for the first part of the mortgage

Your ability to pay back is then examined in the light of theses factors and if the amount involved is less than say 25% of your monthly salary, there is a good chance you'll get it, otherwise it will be a very hard sell.

The bit about never paying the mortgage back really sounded mad to me the first time I got involved in writing software for this market, but the key to it is how they structure their pension funds - long term deposits from pension funds are used to match the portion of a mortgage which will never be paid back. This gets over the current problem of Irish banks having to fund long term investments from short term deposits.

In a way it is funny how all parties in Ireland are working from the assumption that a mortgage must be paid back.

Jim2007

 

[onq]

Its the way we were brought up + most of us don't think like financiers, who understand money differently.

 

[Brendan Burgess]

In a way it is funny how all parties in Ireland are working from the assumption that a mortgage must be paid back.

Jim2007

Hi Jim

As a member of last year's Expert Group on Mortgage Arrears, I spent a considerable time challenging the idea that a mortgage had to be paid back in 20 years or by retirement or whatever. I got the idea across that a mortgage was renting money instead of renting a house.

I managed to stop a proposal for Split Mortgages last year, but they had forgotten my lessons by this year.

My main worry is that the banks will go along with the idea just to pretend that they are doing something.

Brendan

 

[ciarand]

Hi Brendan,

Do you know if any of the banks have actually launched split mortgage products?

Regards,
Ciaran