Case study AIB Buy to let question

[Cafferty]

Hi,
I would appreciate guidance on what action I should take based on my circumstance below.

Income details
Net monthly (i.e. after tax)Full tiime 4200 per month
I was made redundant in March 2018 and started a new job one month ago which is a full time position.
Net monthly partner not working, no other income other than child benefit and rental income below
Income history:
Amount of child benefit received 560 per month (4 children)
Amount of Mortgage Interest Supplement received None

Personal circumstances so we can calculate your reasonable living expenses
Two adult family
Do you need a car for work or do you use public transport? Need a car for work.
Number of children 0- 2 years old: 0
Number of 3 years old children: 1
Number of 4 - 11 years old: 3
Number of 12 - 18 years old: 0
Monthly childcare costs: 200
Monthly spend on special circumstances: 0



Home loan
Lender: BOI
Amount outstanding: 280,000
Value of home: 350,000
Interest rate: Tracker 1%
Monthly repayment : 1439
Amount in arrears : 0

Summary of discussions and agreements with the bank - No issues, paid extra 16k 5 years ago to help shorten the term.

Investment property 1
Lender: AIB
Amount outstanding: 183,000
Value of home: 170,000
Interest rate: Tracker 1.1%
Monthly repayment : 168 interest only or 1355 principal and interest (has been on interest only since 2015 and also during a lot of the recession)
Amount in arrears : 27,500
Monthly rent received : 900 gross, paying higher rate of tax on this, so 500 net approx

Investment property 2
Lender: AIB
Amount outstanding: 117,000
Value of home: 170,000
Interest rate: Tracker 1.1%
Monthly repayment : 910 capital and interest
Amount in arrears : 0, arrears were capitalised by AIB 2 years ago
Monthly rent received : 800 gross, paying higher rate of tax, so 450 net approx


Credit Union
Amount of shares: 0
Amount of loan outstanding : 0
Monthly repayment : 0
Term left : 0


Other loans and creditors
None

Other savings and investments
60,000 of savings in BOI current account

Do you expect any lump sums in the medium term future?
No


How important is retaining the family home to you?

I really want to keep the family and it is sustainable.


Any other relevant information
In my last SFS to AIB in May, I had just been made redundant and proposed to sell the BTL house in arrears and go to interest only on it while I tried to sell it. AIB responded with separate letters - one saying declined, its outside the MARP and I must sell or voluntary surrender, then two days later a new letter saying a new interest only period was approved until December 2018 without any clause about having to sell. I used my lump sum to pay all mortgages as agreed in the meantime. Now I started a new job and recently an AIB case officer called me to ask if I had sold the property yet. I said no because AIB had not made any proposal on the negative equity / outstanding balance. She said I could pay it off at 1.1% over 7 years. I have nothing in writing.

What is your preferred realistic outcome?
I need help to figure out what makes the most financial sense or is the best way forward, I see the following options:
1. Sell one buy to let and take the AIB deal on the balance or use my savings to pay it off if they give it to me in writing. Is this even a good deal - I have paid off almost all the interest on the mortgage over the years so this looks like I will have to pay the 1.1% twice on the balance owed?
2. Sell both buy to lets and use the equity and some savings to buy an apartment in Poland debt free where I have contacts.
3. Use my savings to reduce the debt on the buy to lets to make the repayments more manageable

Thanks.

 

[Brendan Burgess]

This is quite unbelievable.

You have €60,000 in savings yet you are €27,500 in arrears. And you want a deal on the shortfall????

Quite apart from the fact that you are a strategic defaulter, you have destroyed your credit rating.

You are very lucky that AIB has not appointed a Receiver to the property in arrears. There is a real risk that a new case officer might do that. Check the mortgage agreement to see if it allows them to appoint Receivers to both if one is in arrears.

1) Pay off your arrears immediately.
2) That will leave you with €32,000
3) You are receiving €500 net rent and have monthly repayments of €1,355, so a cash flow shortfall of €900
4) The €32,000 cash will fund this shortfall for 3 years and that is what it should be used for.

Both of these investments are very profitable and should be kept as long as possible.

After about three years, depending on your income and expenditure in the meantime, you may find yourself running low on cash.

At that stage, you should probably sell one of the investment properties.

The important point which you probably do not understand is that using the €60,000 to meet your arrears and mortgage repayments is all capital repayments. So you are not "wasting" your capital. You are just using it to reduce the balance due on your mortgage.

After three years, assuming no change in property prices, the figures for Property 2 will be something like the following:

Value of property: €170k
Mortgage: €100k
Net proceeds of sale: €70k

 

[Brendan Burgess]

Another consideration is your exposure to the property market and the reliability of your job.

If property prices remain the same, if interest rates remain low and if you keep your job, everything will be fine.

But when interest rates rise or if you lose your job, you could be in trouble. And then property prices might be lower just as you need to sell a property.

So, it's a close call. Under the circumstances, you might consider selling one of the properties now while the market is good.

If property prices rise, then you will benefit from the two remaining properties. If property prices fall, you will be glad you sold.

You should not use the cash released to pay a lump-sum off either of the other mortgages. You should keep it to feed the shortfall and as a cash reserve.

If you feel that you do have enough cash and can pay a lump-sum off a mortgage, you should pay it off your home loan as you get no tax-relief on it.

Brendan

 

[Cafferty]

Thanks Brendan,
I am definitely not trying to be a strategic defaulter, the arrears built up in 2014/2015 when I had no savings and the rent was significantly lower. I only recently got the 60k because I was made redundant earlier this year and could not use that until I got a new job which is now and hence why I'm trying to figure out the best way forward.

 

[Brendan Burgess]

Ah, I see. But once you got the money earlier this year, you really should have paid off the arrears immediately.

It's understandable that you might not see that from the perspective of being unemployed, but once you got a job back, you should definitely have paid off the arrears.

And now, there is absolutely no excuse. You should do it today.

Brendan