Key Post The impact of the different restructuring options

Restructuring a mortgage with a balance of €200,000 with a 5% interest rate and 20 years left to run


You have struggled on with salary cuts, tax hikes and increased day to day living expenses but you have run out of road. You have kept up your mortgage repayments so far, but something has to give. You are not alone. The Central Bank reports that almost 70,000 people facing this dilemma have got the agreement of their bank to restructure their mortgages to reduce the monthly repayment.

Let’s say you have €200,000 left on your mortgage with 20 years to go and the interest rate is 5%. The repayment is €1,319 per month at the moment.

The first thing that the bank will offer you is to extend the term of your mortgage to say 25 years. This will reduce your repayment to €1,169 per month a saving of €150 per month. But of course you will have 5 extra years of payment. And the total interest you repay to your bank will increase by €34,000. That sounds a lot, but it’s not a figure you should focus on too much. Sure the bank will make more profit out of you, but by the same token you will have use of their money for an extra 5 years. And when your income improves in a few years, you can always increase the repayments again, paying off the loan earlier and reducing the total interest you pay the bank.

If €150 a month is not enough of a saving for you, you can ask to switch to interest-only for a period. This will reduce the repayment to €833, a saving of almost €500 per month. But if you go interest only, you are not reducing the outstanding mortgage, so the long term cost will be much higher. Let’s say that they bank offers you one year at interest-only followed by increased repayments for 25 years. Your repayment will increase to €1169 per month after a year and you will pay a total of €161,000 in interest.

And what if you have lost your job and can make no repayments at all for a year? The lender may agree to a one year full payment moratorium where you pay no interest or capital. At the end of that year, the amount you owe will go up to €210,000. The repayment over the next 25 years will be €1,227 or a total of €168,000 in interest.

The most important thing is that you do talk to your lender before you go into arrears. 70,000 people have done so and have reached agreement on a reduced mortgage payment. This takes the pressure off and it also makes sure that you don’t damage your credit record. A restructured mortgage is noted on your ICB record but it does not affect the overall rating. A month or two of arrears, and you will be classified as sub-prime for many years to come.

But it’s better late than never. If you have fallen into arrears, call your lender and they will work with you on a plan to sort it out. They will reschedule your mortgage. Initially they will “park” the arrears. They won’t be written off but they won’t aggressively pursue them. After a year or so, if you have stuck to the revised agreement, they will “capitalise” the arrears. If your lender offers to do this, they are not giving you something for nothing. Say you owe €190,000 + €20,000 in arrears, they will just add the two together and say you owe them €210,000 While the amount due remains the same, they are acknowledging that you don’t have to pay the arrears in one lump sum. They will collect them over the remaining term of the mortgage as if they had given you a top-up. But most importantly of all, if you don’t have any arrears, they can’t initiate legal action against you.

Nice post this!

Just to add a line or 2 on the issue of always having sufficient life cover to match whatever restructuring takes place.

Most mortgage protection policies are done on a reducing capital balance which means that the pay-out in the event of death matches the residual balance on the mortgage.

Many restructurings of debt involves extending the term, say from 20 to 25 or 30 years.

These restructurings will normally include new policies to cover this and therefore there is usually not a problem.

However if you say go interest only or take a repayment holiday, the capital due on the debt will get out of sync with the pay-out value of the protection policy, resulting in the policy not covering the capital.

One way to address this is to take a mix of reducing balance term assurance protection policies and fixed term policies.

Say in the case described above you take 90k reducing term and 110k level term cover.
This means that the 110k policy is always 110 until the end of the term so if interest rates go up and you keep to the same repayment, the unpaid principle should be covered.

I say should as you need to crunch the numbers for each case.

My final comment is that unless the interest rate implied in the reducing term assurance policy calculation matches the rate on the debt then the capital balances will not match.

Good point Hasta.

Someone else commented to me that the extra interest you pay for rescheduling should not surprise anyone. If you hire a car for a week but decide to keep it for 2 extra days, you should be prepared to pay additional rent.

Brendan

Restructuring a mortgage with a balance of €200,000 with a 5% interest rate and 20 years left to run

I provided the final column of "Total interest over life of mortgage" because people ask for it.

However, I want to stress that this should not be a major factor in your decision.

It is best to judge the cost of a mortgage by the interest paid annually.

For example, if you have a €100,000 interest-only mortgage at 5%, the interest will be €5,000 per year.

If you pay the mortgage off after one year, the total cost will be €5,000.
If you keep the mortgage for 10 years, the cost will be €50,000
If you keep it for 30 years, the cost will be €150,000.

It's not the full picture to say that by paying it off after 10 years, you are saving €100,000.

If instead of paying it off, you buy shares which rise in value to €200,000, then you are better off.

Another way of looking at it is to consider deposit rates.

The longer you leave money on deposit, the more interest you will earn. But it's still best to judge it on an annual basis.

These will normally include new facility documents and possibly mortgages so the bank can erase their mistakes and suck you in further.

I don't see how paying even more or agreeing to paying even more is in any way a good solution for anyone.

Your property is devaluded and you cant afford the loan so the bank says the best solution for them is if you pay even more.

yip paddy great idea!!

I know this is a very old post but if the banks offer you to extend the term of your mortgage because you have arrears does this mean that the terms & conditions change??...im in this situation now...have 7,500 arrears on our mortgage plus 28 yrs left (was 35 yrs) & its also a tracker mortgage...they offered to extend the term by 5 yrs but i would hate to lose the tracker....very unsure about what to do....

It's very unlikely that you will lose your tracker. If it's a mortgage on your home, they would have to spell it out very clearly. I am not aware of any banks taking trackers off people for their family home as a condition of restructuring.

Bank of Ireland does try to get people in arrears on investment properties off their trackers. But it should be clear from the documentation. However, the documentation is extensive and someone reading it quickly might overlook it.