Case study Unsustainable mortgage, investment property and large overdraft

[Alwyn]

Personal details
Income self: Self employed €1,200 net income per month.
Wife's Income: €900.00 net per month

We are both named owners on both properties.

Home loan
Lender: Foreign institution based in Ireland
Amount outstanding: €350,000
Value of home: €190,000 approx. Though houses have sold for less.
Interest rate: Fixed rate 4.5%.
Monthly repayment: I'm currently paying €600 per month but should be paying €1,600 each month.
Amount in arrears: €30,000 approx

Non stop communication with bank. Always inform them of situation and never leave them out of the loop. Constantly coming up with solutions how to clear the debt but they do not seem interested and keep kicking the can further down the road. I have also been berated for constantly making contact with them. Mortgage got into difficulty in 2010. I was placed on interest and part capital only.

I asked them would it be possible to have a mortgage break i.e. make no payment for a period of one year. They declined and our situation got worse. I was then put on interest only. Situation declined further and I was contacted by telephone by the manager who asked me to name a figure we could afford each month. I said €600 and he agreed. I was placed in MARP in January 2012.

Investment property -
Lender: Irish institution
Amount outstanding: €100,000
Value of home: €40,000
Interest rate: Tracker 2.1%
Monthly repayment €200.00
Amount in arrears €200.00
Monthly rent received €300.00

Other loans and creditors -
Overdraft €100,000

Other savings and investments
Any savings we had have now been cleared out as we were using them to pay our mortgage.

 

[Brendan Burgess]

Summary

|Total|Home|Investment|Overdraft
Value|240|200|40|
Loan|550|350|100|100
Deficit|210|150|60|100

Monthly Income €2,100 per month for a couple - no children
Annual income: €25,000

First - is there any way you can hang onto your home?

Let's assume you would like to hang onto your home.

Can you pay interest on the current value of your home?

For simplicity of calculations, I have rounded up the property value to €200k. If the bank agreed to accept interest only for 5 years, you would pay interest of €9,000 a year on this. Interest would continue to be charged on the €150k but it would be rolled up. Out of an income of €25,000, I don't think you can pay €9,000 interest.

If you could pay €9,000 interest, then the deferred €150,000 would be rolling up by €7,000 a year.

This seems to me to be totally unsustainable, even if the bank would agree to it.

I think you must agree to sell your home.

Is moving into the investment property yourself an option?
Could you sell your home and move into the investment property?

If so, you could pay the mortgage on this and try to settle the other debts.

I assume not, but if this is an option, I would propose an alternative plan to the following.

Can you opt for the Mortgage-to-Rent Scheme ?
Under the Mortgage to Rent Scheme, a Housing Association would buy your house from you for €200k and rent it back to you. You would become their tenant.

You would still owe the shortfall of €150k but it would be an unsecured loan.

If you want to hold onto your home, then investigate this. You may have to get rid of your investment property first.

Try to do a deal with your creditors

I would propose the following
1) An orderly sale of your home
2) An orderly sale of your investment property
3) Immediate write off of the overdraft

Would the overdaft lender agree to this?
They probably wouldn't as they get nothing. Is the overdraft lender one of the two mortgage providers? If so, they might agree to it as part of the package.

Why would the mortgage providers agree to this?
An orderly sale of the properties will be quicker and cheaper than repossessions or abandonment.
While you are waiting for a buyer, you will pay as much as you can towards the mortgage.
No money wasted on insolvency costs

Get the mortgage providers to agree to a Debt Settlement Arrangment when the legislation is introduced
After the sale of your properties, this will be your position:

shortfall on home loan|€150k|48%
Shortfall on investment property|€60k|19%
Overdraft|€100k|32%
Total|€310k|

Under the Debt Settlement Arrangement, it will be binding on all creditors as long as 65% agree to it. The mortgage providers account for 67% of the loans and so can "impose" a settlement on the overdraft provider.

If the lenders don't agree to this, then go to the UK and go bankrupt. Come back after a year debt-free.

 

[Alwyn]

Brendan, thank you for giving me your time to go through all of the above.

I will write to my home loan provider and ask them for a 5 year interest only payment plan. They are a very tough lender and I am presuming they will say no but there is no harm in trying I suppose.