Key Post How to analyse an offer of a split mortgage

This thread is for people who have been offered a split mortgage to help them to decide on whether to accept it or whether to go for a Personal Insolvency Arrangement or a voluntary sale of their home.

The lenders have not published their criteria for split mortgages, so each case has to be judged on its specific terms and conditions. For example, AIB and ptsb do not charge interest on the split portion whereas Bank of Ireland does charge interest.


What is a split mortgage?



John has 20 years left on his mortgage of €300,000 at 4.5%.
He can’t afford the repayments of €1,900 a month
The lender agrees to extend the mortgage term to 25 years and to warehouse €120,000 ]at 0% interest

Assuming the borrower’s repayment capacity remains the same over the next 25 years



The borrower will gradually repay the capital down to €120k over the next 25 years.
If the property today is worth €300k, then the borrower is gradually building up equity.
However, if the property is worth €100k today, the borrower will be simply paying off negative equity for many years to come.

What happens if the borrower’s ability to repay improves in the future?
If the borrower gets a salary increase and can afford more than €1,000 a month, some of the warehouse will be moved into the Active mortgage. This is decided at the lender’s sole discretion.

If they receive a lump-sum they are expected to pay down the warehouse as well.

What happens to the warehouse at age 70, assuming it has not been cleared before?
The €120,000 is still owing. The lender may insist on the sale of the house or may move it to the active mortgage and the borrower repays it out of their pension.

What happens if he sells after ten years?
From the table above, it will be seen that the borrower still owes €250k after 10 years.

If the property is sold for €300k, the borrower will have €50k cash.

If the property is sold for €200k, the borrower sill still have a mortgage shortfall of €50k.

Text of split mortgage offers from various lenders

PTSBN courtesy of mortgagebrokers.ie:

[broken link removed]

Is the split mortgage sustainable?


If the borrower can pay €1,000 per month, it is sustainable. If they can’t, it’s not sustainable. It might well be a good deal, but if it’s not sustainable, the borrower will just go back into arrears.
Sustainability is a matter of opinion.

The Insolvency Service has issued guidelines for Reasonable Living Expenses which are discussed in more detail here.

For example, a two adult household with a car and two children attending secondary school would have RLEs of €2,100 per month.

If their net income is €3,300 a month, they would have €1,200 available for paying their mortgage and other debts.

In our example, the monthly repayment is €1,000 per month, so the mortgage, at first glance, is sustainable.

"But I can't live on €2,100 a month?"
Up to now there was huge conflict between lenders and borrowers over what was a reasonable amount to live on.

Now the Insolvency Service has worked out what is reasonable and these figures should be used when calculating whether your mortgage is sustainable or not.

If you have exceptional expenses e.g. medical costs, you can claim higher RLEs, but if your expenses are "just higher" you will get little sympathy from the bank.



What about unsecured creditors?
This is really a very difficult issue to resolve.

Your priority is to keep your home. If your lender has given you a split mortgage, it's not unreasonable of them to request you to stop paying your unsecured creditors. It makes no sense to the bank to allow you to reduce your repayments on their relatively cheap loan, so that you can pay your unsecured creditors in full.

The Central Bank is trying to devise a multi-debt protocol to put all this on an agreed footing.

But it may be that your mortgage is just about sustainable after it is split, but if you have €50,000 of unsecured creditors, the split will fall apart.

You could go for a Debt Settlement Arrangement for your unsecured creditors
You could try to get your unsecured creditors formally written off under a DSA which would not involve your mortgage.

However, if you are going for a DSA, you might as well go for a Personal Insolvency Arrangement, which is discussed later.

Would you be better off with a Personal Insolvency Arrangement?

A Personal Insolvency Arrangement is a new process under the new Insolvency Act as alterntative to bankruptcy.
A Personal Insolvency Practitioner (PIP) designs a scheme which is fair to all your creditors.
The creditors must approve of it. If a certain percentage vote agains it, it is dead in the water.
If it's approved it will probably last for 6 years.
If you stick to it, your unsecured creditors and some of your mortgage will be written off after 6 years.
The PIP is obliged to attempt to keep the family home where suitable and possible.

[FONT=&quot] If they do approve a PIA, it might look something like this.[/FONT]

• [FONT=&quot]Reduce mortgage to €180,000 [/FONT]
• [FONT=&quot]Extend term to 25 years[/FONT]
• [FONT=&quot]New repayments: €1,000 per month[/FONT]
• [FONT=&quot]A[/FONT][FONT=&quot]fter 6 years, €120,000 is written off[/FONT]
• [FONT=&quot]If they sell within 20 years, clawback of any increase in property value [/FONT]
• [FONT=&quot]After 25 years, they own the house mortgage-free – no clawback if sold [/FONT]

A mortgage lender who has offered a "generous" split mortgage, is unlikely to approve a PIA, so you would be back to square one.

Comparison of a split mortgage with a PIA

Which to go for if you have a choice...

Would you be better off selling your home and trying to do a deal on the shortfall?


[FONT=&quot]If the bank vetos the PIA and offers you a choice between a Split Mortgage and selling the house, which is better?
[/FONT]
Disadvantages of a split mortgage

• You could be paying off negative equity for a very long time
• Your repayments will increase if your salary increases
• You may have to pay any lump-sums to your mortgage lender

[FONT=&quot]If the Split Mortgage is unsustainable or just barely sustainable, then you should consider a voluntary sale.
[/FONT]
[FONT=&quot]If you sell the house, you can get the shortfall written off in one of the following ways[/FONT]

• · [FONT=&quot]By concession from the lender [/FONT]
• · [FONT=&quot]By a Debt Settlement Arrangement[/FONT]
• · [FONT=&quot]By bankruptcy in Ireland – 3 years[/FONT]
• · [FONT=&quot]By bankruptcy in the UK – 1 year [/FONT]

[FONT=&quot]
[/FONT]

[FONT=&quot]What to look out for in your offer of a split mortgage facility

[/FONT]

• [FONT=&quot]That you are not losing a tracker rate [/FONT]
• [FONT=&quot]What you do with lump sums
  [/FONT]

[FONT=&quot]

to be completed - any suggestions?
[/FONT]

[FONT=&quot]Other issues to consider

[/FONT][FONT=&quot]If your mortgage has a guarantor who might be called on in the case of bankruptcy, then a split mortgage is very attractive.
[/FONT]

Excellent work Brenadan, I wonder does inflation also have a huge part to play in choosing a split, where the 'parked' amount will hopefully look a whole lot smaller in 20/30 years time?

daftpunk said:

Excellent work Brendan,

Click to expand...

Thanks

I wonder does inflation also have a huge part to play in choosing a split, where the 'parked' amount will hopefully look a whole lot smaller in 20/30 years time?

Click to expand...

There are two types of inflation which are relevant.

Higher house price inflation

For example, if you have a house worth €100k and a mortgage of €150k and you expect house prices to rise by 50% over the coming 5 years, then you should hold onto the house as house price inflation will wipe out your negative equity and make you solvent. Even if you can't afford your repayments, at least you will be able to sell the house without a shortfall.

If you expect house prices to fall, and you are in serious negative equity already, it's probably not that serious as you are insolvent anyway.

If you expect house prices to fall, and you have positive equity, this would argue towards selling. In general, if you expect the value of an asset to fall, you should consider selling.

Salary inflation


People ask what they will do when they are 70 if theree is still €120,000 in the warehouse?

The interest rate is artificially low at the moment at 4.5%. Let's assume that the average rate in 30 years is € 6.5%. The interest on the loan will be around €650 per month.

The Contributory OAP for a couple today is €1,800 a month, so €650 represents around 36% of that.

If the OAP increases by 2% a year for 30 years, it will be €3,200 in 2043, so €650 will represent only 20% of it.


However, salary increases may result in moving money out of the warehouse.

Any increases in salary ahead of inflation will result in moving money out of the warehouse and into the active loan. This is ok, if you don't have negative equity. While you have negative equity, salary increases will simply result in reducing the negative equity.

Interest rate increases
Interest rates are low at the moment - July 2013 - but they are not expected to rise for a year or so. When they do rise, the repayments will be more difficult.

Should a structure be agreed with the bank regarding salary increases (and decreases) and how much will be moved out (or back in) to the warehouse?

e.g. If my take home pay increases by €100 per month should the bank just increase the mortgage by €100 a month?

Hi mannin

That is a good point. I have seen the paperwork for only one split mortgage and it said that the money could be moved from the warehouse at the sole discretion of the lender.

It would be much better if the agreement included a formula as you suggest.

Brendan

Looking at how you have analysed it a PIA would suit us better,€600 is all we have been able to afford toward mortgage for awhile now and that's not because we have been saving some for us to go out and enjoy ourselves etc that's the max we can pay after everything else is taken into account.
We could manage the split mortgage offer what EBS have offered us but but mean not paying any of our loans and have them hassling us,plus if our financial circumstances worsened after agreeing the split mortgage we could be back to square one.
By trade i am a Painter and Decorator and work for me is non existent but have applied for an apprenticeship in another area but won't hold my breathe.
The More i look at the split mortgage offered the more i realize it maybe isn't any better for us.We would need more warehoused to bring the payments down further for us to be able to afford it.

Brendan Burgess said:

Would you be better off selling your home and trying to do a deal on the shortfall?

<snip>

[FONT=&quot]If you sell the house, you can get the shortfall written off in one of the following ways[/FONT]
<snip>

Click to expand...

If you sell and want to continue paying the shortfall, is there the option of not doing a deal?
Do the banks continue to charge the same interest rate as the mortgage, same term etc , or do they, because it is now a unsecured debt, increase the interest rate on the outstanding amount to reflect that?

I had an article in the Indo yesterday based on this thread. Unfortunately the heading sounded just like another letting off steam opinion piece, so I think most people will skip over it.

Lenders should make settlement deals more attractive to those on low incomes

Blinder said:

If you sell and want to continue paying the shortfall, is there the option of not doing a deal?
Do the banks continue to charge the same interest rate as the mortgage, same term etc , or do they, because it is now a unsecured debt, increase the interest rate on the outstanding amount to reflect that?

Click to expand...

Hi Blinder

If you can afford to repay the shortfall out of your income, then you should do so. It's better to pay off your loans if you can.

The practices of the different banks is different towards the shortfall. In general, they charge the same interest as they were charging on the mortgage. So if you had a cheap tracker, they should continue to charge at cheap tracker rates.

You can see the text of the voluntary surrender documents here

EBS: We will continue to be liable to EBS limited for payment of this
deficit under the terms of my/our mortgage
BoI /ICS :
with on going interest in line with the terms and conditions of my mortgage loan offer letter ...
AIB seems to be silent on the issue, but I would imagine it's the same as EBS.
ptsb and IBRC seem to be silent on the rate charged but state that interest will be charged.

Brendan

The clear message coming from the banks is that they will simply not entertain a PIA or DSA from a borrower who is only exposed to one bank. They have no wish to pay the fees of a PIP, and to comply with the cumbersome Procedures of a PIA/DSA. In such cases the bank's clear preference is to negotiate directly with the borrower. Accordingly, many people will not have the option of choosing between a split mortgage and a PIA/DSA.

Jim Stafford

DMcGowan said:

thats exactly the message I got from BOI yesterday at my meeting, he was insistent there would be no write offs on mortgages. They prefer the borrower to deal directly with them and NOT through a PIP

Click to expand...

I would second that - my banks preference is to push for judgement / bankruptcy as opposed to a more sensible commercially negotiated settlement.

Jim Stafford said:

Brendan

The clear message coming from the banks is that they will simply not entertain a PIA or DSA from a borrower who is only exposed to one bank. They have no wish to pay the fees of a PIP, and to comply with the cumbersome Procedures of a PIA/DSA. In such cases the bank's clear preference is to negotiate directly with the borrower. Accordingly, many people will not have the option of choosing between a split mortgage and a PIA/DSA.

Jim Stafford

Click to expand...

Hi Jim

That is very interesting. I guessed as much in my post on the topic, but it was a theoretical point.

A mortgage lender who has offered a "generous" split mortgage, is unlikely to approve a PIA, so you would be back to square one.

Click to expand...

I will edit my post to highlight this.

Have they made any public statements on this?

the bank's clear preference is to negotiate directly with the borrower.

Click to expand...

The problem is that they don't really "negotiate" with the borrower - on home loans anyway. They put a proposal to the borrower which the borrower can accept or appeal. At least with a PIA, the PIP genuinely looks for a solution - presumably sounding out both sides in a bit of horse trading.

I imagine in some cases, the bank will tell the PIP that there is no point in proposing a PIA, as they will veto it.

Is the PIP then allowed to stop the process and negotiate a better split on the borrower's behalf? A PIP, acting as a PIP, is supposed to be independent.

Brendan,
Do
You think they will reject lots of PIA applications in favour of split mortgages? Can they do that if you genuinely don't have the money to sustain or ever pay off the parked amount?
I did also read today that they are considering where the bank owns part of the house/percentage and can request if sold at any time but I'm guessing this is a split mortgage phrases differently.