# Why should a mortgage be paid off by retirement to be considered sustainable?



## Brendan Burgess (12 Jun 2013)

It is  assumed by the Central Bank and by the Insolvency Service that a mortgage is only sustainable if it is paid off in full and the borrower is mortgage-free at retirement.

Why should this be?

If  a 65 year old has a €100,000 mortgage on a house worth €150,000 and he can afford to pay the interest on the mortgage, then it is sustainable, even if they cannot pay off any of the capital.   What is wrong with continuing to pay the interest on his mortgage each year?  He is paying €4,500 a year at current interest rates. He gets to keep his house and his outgoings are lower than renting a similar house would be.  Should he be forced by the lender or by the Central Bank to sell the house to pay off the mortgage?*

In Switzerland, they give indefinite interest-only mortgages up to 67% of the value of the property *
]In a country where people are happy to rent long-term, they understand that paying interest on a mortgage is the equivalent of renting.  Of course, the borrower can repay the loan if he wishes. More information here
*
In Ireland, some people have no choice but to rent all their lives *
Many  people in Ireland have no choice but to rent in their retirement, because they have never owned a home. No one says that their position is unsustainable because they will never own a house.
*
And what about Bank of Ireland’s Life Loan?*
They lend an elderly borrower who owns their home outright a sum of money and roll up the interest. The mortgage is not repaid until the borrower dies. No one suggests that this is an unsustainable mortgage. 
*
A well secured loan on which standard interest is being paid, is sustainable for the bank.*
It must be much more profitable  and much less risky for a bank to allow a borrower continue to pay interest at 4.5% on a loan which is secured by a much more valuable property than to issue a new loan at 92% LTV to a new customer.

Of course, if a borrower has a cheap tracker, then the bank would want the loan repaid in full and as quickly as possible.


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## Brendan Burgess (12 Jun 2013)

The* Insolvency Service *assumes that a PIA must involve the mortgage being repaid in full by retirement




> The PIP notices that the term of the mortgage cannot be extended since it already runs until Anne and Barry reach 70.


and 



> To achieve this,  the PIP proposes a term extension of five years. The term of the John’s  mortgage cannot be extended further due to John’s age.


Under the *Central Bank's* Mortgage Arrears Plan ,  each bank has targets for “sustainable solutions”  which are defined as follows



> sustainable solution which is likely to enable the customer to meet the original or, as appropriate, the amended terms of the mortgage over the full remaining life of the mortgage,* including repayment of the original or an agreed revised principal sum where offered*. This may include an interest only or other temporary solution for a period *if it is likely that full repayment of the original or revised principal will be achieved over time*, or where there is a payment plan to return the account to sustainability through the clearance of arrears



Could this mean paying the interest on the mortgage for the full term and then selling the property to clear the debt? 

I wouldn't read it like that, but *Governor Honohan *seems to support this interpretation in his speech to the FMC conference (  [FONT=&quot]The full text is [/FONT][FONT=&quot]here)[/FONT]



> [FONT=&quot]1)      [/FONT]_[FONT=&quot]Treatment at term of warehoused part of split mortgage: [/FONT]_[FONT=&quot]I can’t see how a modification could be considered sustainable if, after paying all the newly contracted payments (including conditional amounts), the borrower could end the term still in debt.   Accordingly, at the very least, recourse at term should be limited to the collateral value.  In other words, the modification agreement should specify that, at the end of the term, any shortfall in the warehouse after sale of the property would no longer be owed.  [/FONT]


He seems to be assuming that at the end of the term, the borrower's mortgage should not be higher than the value of the property. This seems very reasonable to me.


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## MortgageGuy (13 Jun 2013)

I don't understand why anybody would sign up to a deal where they make capital repayments for many years then are still in negative equity or at the strong risk of it, in that case they will never be an owner and may want to consider some other alternative such as mortgage to rent (which at least gives them tenancy options they can move on from). 

On the retirement age front, I think pension lump sums may start to get factored in, there are requirements on windfalls in the resolutions schemes already, and while your retirement sum is not an unexpected windfall it is a large sum with a known due date. 

As for going beyond age 70? Should that be open to negotiation if that is what the person wants? There are people who rent houses after age 70 and have that as an outgoing, why - in particular if retirement may be raised to that age in time - shouldn't a person be able to voluntarily opt for that themselves? It may be a bad idea if the bank were able to pull that trigger.


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## Brendan Burgess (14 Jun 2013)

> As for going beyond age 70? Should that be open to negotiation if that  is what the person wants?



I would suggest that there should be no end date for a mortgage.  If I can pay the interest on my mortgage out of my income, then my mortgage is sustainable whether I am 25 or 85. 



> I don't understand why anybody would sign up to a deal where they make  capital repayments for many years then are still in negative equity or  at the strong risk of it



My main point is that someone who is in positive equity at Age 70 who can afford to pay the interest on their mortgage has a sustainable mortgage. 

If I am 40 and can afford my repayments, although I am in severe negative equity, I am not insolvent and must continue to pay the full repayments.  The insolvency legislation is for those who can't afford their repayments, not for those in negative equity.


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## Brendan Burgess (14 Jun 2013)

MortgageGuy said:


> I don't understand why anybody would sign up to a deal where they make capital repayments for many years then are still in negative equity or at the strong risk of it, in that case they will never be an owner and may want to consider some other alternative such as mortgage to rent (which at least gives them tenancy options they can move on from).



This is a separate issue, but as it's so important, I have copied it to a new thread. 

Why should someone in deep negative equity make capital repayments?


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## Brendan Burgess (1 Aug 2013)

This really is a very imortant issue and the country's arrears policy is being developed based on a fundamentally flawed assumption that mortgages must be paid off by age 70.

The Central Bank has publishedDRAFT  Internal Central Bank Guidelines - Sustainable Mortgage Arrears Solution and they again refer to the definition in the MART document.



> A sustainable solution must be likely to enable the customer to meet the original or, as appropriate, the amended terms of the mortgage over the full remaining life of the mortgage, including repayment of the original or an agreed revised principal sum where offered. (This is to be understood to include the specific treatment of the warehoused portion of the split mortgage as outlined above). The revised mortgage servicing terms may be conditional on borrower’s income;


This definition is, as predicted, doing enormous damage.  Older borrowers who have plenty of positive equity but who will not be able to pay off their loan by retirement, are being told to sell their home or have it repossessed.

I also expect that with the removal of the ban on taking people off trackers, lenders will use this definition to designate cheap tracker mortgages where the borrower can't pay the capital as "unsustainable".


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## stephnyc (1 Aug 2013)

just a thought, isnt mortgage protection insurance usually a condition of obtaining a mortgage? Although I know the condition can be waived in certain circumstances.

I dont think it would be a stretch to think that due risk of insuring a mortgage of an older person (70+) that maybe the premiums would be too high or the insurance company would not cover the person - therefore the risk to the bank is higher, as they cannot be sure that the full mortgage would be recovered, especially in a volatile market (who is to say what state the house might be in, or whether the last valuation is still accurate)

just another angle, or am I missing something?


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## Brendan Burgess (2 Aug 2013)

I don't really think that is that big an issue. 

The primary purpose of Mortgage Protection Insurance is for situations where a joint owner e.g. the husband dies at age 35. The bank does not want to kick out the wife and family so the insurance company pays off the mortgage. 

If a 70 year old woman dies while she and her husband still have a mortgage of €100k on a house worth €200k, it's not big a deal. She should still be able to pay the interest on the €100k.  70 year olds usually don't have dependents so if it's a €200k mortgage on a house worth €500k, the house can be sold, or the unaffordable  interest could actually be rolled up.

I have seen a few cases recently where single  borrowers in arrears are paying  mortgage protection premiums.  They will get no benefit from a claim. They would be far better off scrapping the mortgage protection and using the money saved to make mortgage repayments.  The bank would be better off as well.  On a very few occasions they will lose out if the borrower dies with no mortgage protection, but in the vast majority of cases, they will see higher mortgage repayments.


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## wbbs (2 Aug 2013)

I'm not sure any pensioner on just state pension only would be able to pay any interest though, maybe if there was another private pension coming in there would be some chance.


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## stephnyc (2 Aug 2013)

Brendan Burgess said:


> They will get no benefit from a claim. They would be far better off scrapping the mortgage protection and using the money saved to make mortgage repayments.


 
Thanks for your response. Can I just cancel the mortgage protection in this case? Will the bank allow it? Or would I need to be in MARP or something?

I do agree with your premise, that as long as there is equity & the owner(s) can afford at least the interest, there is no reason why a healthy 70+ person could not have a mortgage. I think it is more for historical/social reasons that this has not been done i.e. banks want the security that the mortgage is paid for by a definite deadline (how long would you let the mortgage run? until they are 80? 90?). I'm not sure multi-generational mortgages is something I would ever want to see here, but I assume you would expect that the house is sold & mortgage paid on death. Maybe its a reluctance to have to force the sale at that particular time?


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## Brendan Burgess (2 Aug 2013)

wbbs said:


> I'm not sure any pensioner on just state pension only would be able to pay any interest though, maybe if there was another private pension coming in there would be some chance.



Hi wbbs

OK, so should we  repossess them instead? 

If they can't pay the interest on a €100k loan in retirement, they won't be able to pay the rent either. 

Most of the time, interest is cheaper than rent.

The odd thing about home ownership is that for most people, the house is worth a lot more than the outstanding mortgage.  The lenders could even consider rolling up the interest on the loan. 

Some lenders have given out interest roll-up loans to older people. Yet they insist on being repaid by people who can afford the interest. 

Brendan


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## wbbs (2 Aug 2013)

Not suggesting what can be done, just mentioning that the average state pension is not enough to pay out anything on, mortgage or rent unless you are renting council house.  Don't know what options there would be for someone at that stage other than sell if there is no other source of income.   I imagine if someone was in private rented accomodation prior to pension and income dropped to pension level I presume they would have an entitlement to rent supplement?


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## Brendan Burgess (3 Aug 2013)

Hi wbbs 

A person has accommodation costs at all times in their life, including on retirement. 

There is a poverty problem whereby some people will not have enough pension income to pay for their accommodation and may need state support. 

this is the same for renting as for mortgage interest. 

It is nice to own your house outright on retirement and not have to face any mortgage payments or rent payments. But it is not necessary to force debt forgiveness on lenders to achieve this.   Lenders might do it for loans in negative equity, but they will repossess those with positive equity and tracker mortgages first. 

Brendan


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## Jim2007 (3 Aug 2013)

wbbs said:


> I'm not sure any pensioner on just state pension only would be able to pay any interest though, maybe if there was another private pension coming in there would be some chance.



Just to provide some more info on the Swiss situation, because I know where some of Brendan's thinking is coming from 

- By law all Swiss employers must operate a pension fund for it's employees.  Employees enter the fund at 25 and the contributions at a minimum are 2 to 1.  In the early years the employee will contribute 5% and the employer 10% and this will raise until the employee reaches 55 when it will be running at about 11% from the employee and 22% from the employer

- These pension funds are usually operated by asset management companies and here is the bit everyone will love - the fund must make a minimum return by law, failure to do so means that the fund manger does not get paid and even worse for him, he actually has to contribute to cover the short fall!

- Next equity investing is encouraged almost like home ownership is in Ireland:  Investing is an exempt activity, provided you make no more that 10 trades per month.

All this means that on retirement your average Swiss has a pension equal to about 70% of his salary and an equity portfolio of may be CHF 200K.  So handling the mortgage is not really an issue for them.

I think the mistake right now is that the mortgage issue is being dealt on it's own, where as home ownership was originally encouraged as part of retirement planning.


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## Brendan Burgess (3 Aug 2013)

> Just to provide some more info on the Swiss situation, because I know where some of Brendan's thinking is coming from



Hi Jim

Actually, I thought that the idea of paying off your mortgage by retirement was nonsense long before I had heard that the Swiss think like this as well.  

Buying your own home is very tax-efficient in Ireland - no tax on the imputed rental income and no tax on Capital Gains.  If they taxed both, we would be far less wedded to home ownership. However, I think it is worth encouraging home ownership to some degree.


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## DK123 (9 Jan 2015)

Hi Brendan/everyone.I was wondering if there has been any progress in ireland since by any of the irish lending institutions re extending interest only morgages from age 70 to say age 80 similiar to other countries and where it is risk free and there is no danger of the house owner defaulting and if not do you see it happening in the near future.Thanks


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## Brendan Burgess (6 Jul 2015)

I have just discovered that many Swedish borrowers don't pay off their capital either. 

http://www.fi.se/Folder-EN/Startpag...orts/Listan/The-Swedish-Mortgage-Market-2015/

In 2014, 68 per cent of all households with new loans amortised them, which is a clear increase from 2011, when only 42 per cent did so. 9 out of 10 households with loan-to-value ratios above 70 per cent amortise while it is only 4 out of 10 households with loan-to-value ratios of 50–70 per cent that amortise.

Since households with loan-to-value ratios above 50 per cent might react more strongly to economic shocks, FI has proposed an amortisation requirement in order to assure that these households decrease their leverage over time. FI’s proposed amortisation requirement, which encompasses households with new loans and loan-to-value ratios above 50 per cent, will entail a further increase in amortisation.


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