# New case study from ISI - bank cuts interest where there is no negative equity



## Bronte (19 Sep 2013)

I had a look at the insolvency website, which is much changed since I last looked, to see a scenario for a person earning a substantial sum with a large mortgage.

That doesn't exist in the scenarious, but Case 5 Seamus, single, was interesting.  ( _Attached ) _Seamus has an income about about 2.5K but a mortgage of 1.5K on a house whose value was equal to the mortgage.  They ISI advised an extension of the term and reduction of interest rate (for a few years) but I would have thought selling the property, and going renting would have left Seamus a lot more money to pay back creditors.  

Something else interesting is that the ISI actually mention a suggested fee for the PIP.  How did they come up with the figure of 8.5K, with 2.5K at the beginning.


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## Brendan Burgess (21 Sep 2013)

Bronte said:


> That doesn't exist in the scenarious, but Case 5 Seamus, single, was interesting.  ( _Attached ) _Seamus has an income about about 2.5K but a mortgage of 1.5K on a house whose value was equal to the mortgage.  They ISI advised an extension of the term and reduction of interest rate (for a few years) but I would have thought selling the property, and going renting would have left Seamus a lot more money to pay back creditors.



This seems to be a new case study and it shows the thinking behind the Insolvency Act and the almost total obsessioin with  keeping the family home. 



> 5. POTENTIAL PIA SOLUTION FOR SEAMUS PROPOSED BY PIP
> The PIP assesses whether a change to the term of the mortgage or interest rate will make the mortgage sustainable.  The PIP recommends a term extension on the PPR mortgage for an additional 11 years, bringing the mortgage term to 26 years to expire when Seamus reaches 65 years of age.  The PIP also recommends that Seamus pays interest only for the term of the PIA.  In addition the PIP recommends that the interest rate be reduced from 4% to 3% for the term of the PIA in order to enable Seamus to address some of his unsecured debts.


Why on earth should a single guy require a home worth €200k?  
Why on earth should the lender give him debt forgivness via a reduction in the interest rate? 

He should sell the property and rent a room somewhere. He would have much more money with which to pay off his creditors. 

When the Government or Insolvency Service expresses it like this, no one complains. When Jim Stafford says it in the context of a professional keeping their home, there is uproar.  Jim Stafford is reflecting the culture set by the Government and the Insolvency Service. They are all wrong.  There should not be such an obsession with keeping the family home. 

Jim Stafford's insolvent solicitor should be obliged to sell his home and rent. 
This insolvent single haulier should be obliged to sell his home and rent. 

In practice, the bank will probably go along with the PIA, as there is only around €12,000 of debt forgiveness for them. But the Insolvency Service should not be encouraging it.


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## Bronte (23 Sep 2013)

Brendan Burgess said:


> Why on earth should a single guy require a home worth €200k?
> Why on earth should the lender give him debt forgivness via a reduction in the interest rate?
> 
> .


 

The ISI don't show the calculations for the mortgage, I wonder are they correct. The current mortgage has 15 years remaining with repayments at €1481. 

The ISI propose an extension of 11 years, interest only during the PIA, so presumable 6 years, and an interest rate reduction of 1% from 4% to 3%. So he will pay 503 Euro instead of 1481 currently. They said this would free up an additional 852 montly for 6 years. But 852 + 503 = 1355, not 1481. There's a missing 126 Euro here. 

Can someone double check my figures please. Anyone who is good on mortgages able to see that adding 11 years plus interest reduction would result in these figures.

Some other questions. What happens after the 6 years interest only, I guess Seamus who will now be debt free and so will be able to afford the increased mortgage rate. But what happens to the mortgage is he is not paying down the capital for 6 years, I really like to see the ISI's workings on this.

All this saving on morgage is a loss to the bank, why would the bank go for it. This 'saved' money goes to the unsecured creditors. Would a bank really agree with this. If I were the banks I would not accept this solution, I'd rather take the house and be done with the whole thing.

6 years is a long time, after Seamus has presumable had a very difficult time for the last 5 years. What happens around year 3 when his 3K car collapses. What happens if the inheritence doesn't come through.  What happens in say 5 years time and he loses his job.  

I think this 6 years is crazy stuff.


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## Brendan Burgess (23 Sep 2013)

From the Case study 



> The outstanding mortgage is €200,000
> 
> Mortgage payment: €1,481
> 
> ...



Repayments on €200,000 @ 4% for 15 years = €1,479 - correct 

Interest only at 3% is €200,000 @3% = €6,000/12 = €500 - correct 

Current payment €1,481- new payment €500 = €981 

I don't know where the €852 comes from


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## Brendan Burgess (23 Sep 2013)

Bronte said:


> Anyone who is good on mortgages able to see that adding 11 years plus interest reduction would result in these figures.



Hi Bronte

http://www.loanclc.com/  is brilliant for all this stuff and it's very simple 

On the first line - I entered €200,000 @ 4% for 15 years and got the result.
Then I clicked on the down arrow second from the right hand side and it duplicated that result on the next line. I changed the interest rate and the term and got the new figures. 
It even calculated the interest only figure for you.




> What happens after the 6 years interest only, I  guess Seamus who will now be debt free and so will be able to afford the  increased mortgage rate. But what happens to the mortgage is he is not  paying down the capital for 6 years, I really like to see the ISI's  workings on this.


After 6 years, there will be 20 years left and the capital will be the same 
Again, using the calculator...

€200,000 @ 4% for 20 years will be €1,211


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## Brendan Burgess (23 Sep 2013)

Bronte said:


> All this saving on morgage is a loss to the bank, why would the bank go for it. This 'saved' money goes to the unsecured creditors. Would a bank really agree with this. If I were the banks I would not accept this solution, I'd rather take the house and be done with the whole thing.



Will the bank really try to repossess for €2,000 a year for 6 years? Probably not. They will grudgingly accept this.

If the figures were larger, they would probably veto the PIA. 

A much fairer solution would be for the bank to leave the interest rate at 4% but defer the unpaid interest for the 6 years. So the mortgage at the end of 6 years will be around €213k.   That way if the PIA fails and the house has to be repossessed, the bank will get the interest back if the house rises in value.


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## Bronte (23 Sep 2013)

Brendan Burgess said:


> I don't know where the €852 comes from


 
Maybe the ISI doesn't have your calculator.  Presumable someone on there will here about this thread and re do it.  

I wonder are the other scenarios calculated correctly.


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## Bronte (23 Sep 2013)

Brendan Burgess said:


> Will the bank really try to repossess for €2,000 a year for 6 years? Probably not. They will grudgingly accept this.
> 
> If the figures were larger, they would probably veto the PIA.
> 
> .


 
I guess you're right that they won't repossess for this low mortgage. It's odd though that the ISI has the power to decide interest rates. Does this happen in other jurisdictions.  What happens then if interest rates go up, bank would be losing moring that 2K a year for 6 years.  That would be fine if it's only a very low percentage of borrowers, but what if it was a large chunk of your mortgages.


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## Brendan Burgess (23 Sep 2013)

Bronte said:


> Maybe the ISI doesn't have your calculator.  Presumable someone on there will here about this thread and re do it.
> 
> I wonder are the other scenarios calculated correctly.



I think it's just a simply typo on their part. 

In the other scenarios, the information was much vaguer. I seem to remember I had to guess the figures such as term and interest rate.


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