If I pay capital off my mortgage, what happens if I am struggling subsequently?

Question summarised from another thread

Say, I have a mortgage of €300,000 with 20 years left at 4.5%

The repayments are €1,900 per month.

let's say that I pay €100,000 off the mortgage. This reduces the term to 11 years while keeping the repayments at €1,900 per month.

Let's say that after 3 years, I can't pay the €1,900 per month.

Am I in arrears?
or
Can I claim that I have paid €100,000 in advance?

If someone pays off €100,000 and asks for that to be set off against the capital and have the repayment reduced or the term shortened, I think that they are in a new mortgage contract. So the repayment stays at €1,900 and if the borrower does not make it, they go into arrears.


If there is no discussion to the contrary, I think that such payments would be considered as payments in advance.

In simple terms, if someone is due to pay €500 in August, and they pay €1,000, it would show up as "payments in advance" on the statement.

I think that there have been cases of people paying lump sums off their trackers and the banks refusing to give them any leeway later.

Brendan Burgess said:

In simple terms, if someone is due to pay €500 in August, and they pay €1,000, it would show up as "payments in advance" on the statement.

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In the case I know of the borrower was due to pay a "normal" monthly repayment ( say in the low four figures ) but instead paid a six figure amount. It simply showed up as "payment" on the statement, not "payments in advance".

Brendan Burgess said:

I think that there have been cases of people paying lump sums off their trackers and the banks refusing to give them any leeway later.

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Correct. You have summarised the situation better than I could have done ; many thanks for your reasonableness and summary.

Its an interesting situation and not extremely uncommon I would guess, as some people have ( rightly or wrongly, without the benefit of hindsight) paid lump sums off their tracker mortgages due to ( as someone else pointed out) sale of other property/assets, redundancy, inheritance, pension lump sums or whatever.

I wonder if anyone has had the experience of paying capital off the
mortgage ( in the form of a large lump sum) and struggled subsequently?

If it goes to court, and the borrower is still well "ahead of himself/herself" on repayments ( compared to what they would have paid by that point in time if they had made monthly capital and interest repayments, would the judge find that they were in arrears or not? If nothing else, I think it unfair that the bank would damage the borrowers credit reputation if the bank had already been paid back more thean they envisaged they would be / legally entitled to be by that point in time?

I guess the moral of the story for those who come in to a lump sum ( through eg redundancy, inheritance, sale of other property or whatever ) is not to pay off part of a mortgage in a lump sum....esp. if its a tracker mortgage.

If it goes to court, the issue is less likely to concern fairness or what the debtor thinks the bank envisaged and more to do with contract law. You would do better to have a solicitor read the contract and give their opinion than inviting comments on an contract no-one here has seen. It could well be that the contract allows for lump sum payments without this affecting the requirement to continue to make repayments by monthly instalments.

What if you made an offer to the bank that if you pay off a lump sum and subsequently fall behind that the lump sum would be considered "advance payments". If you get this in writing before you pay over the lump sum then you should be covered.

would you at least be able to negotiate with the bank to extend the term again a little in order to reduce your payments? surely this would be fair & maybe keep someone out of arrears

KBC used to have a facility (maybe they still do?) whereby you could lodge money against the capital sum of the mortgage, but retain the right to withdraw it again some time in the future. In the meantime the mortgage payments reduced proportionately (i.e. interest charged was on a lower outstanding balance and thus repayment was lower).

I thought it was a really good innovation - good for the banks and the consumer. Availed of it myself, putting 25k against my mortgage for a couple of years instead of in a low-yielding savings account.

As I said, not sure whether they still do this or not

DebtCert said:

You would do better to have a solicitor read the contract and give their opinion

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thanks for that but there is nothing in the "contract" about lump sum repayments / capital in advance. Different solicitors can have different opinions.

stephnyc said:

would you at least be able to negotiate with the bank to extend the term again a little in order to reduce your payments?

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in the case I know of, the term was not altered. The term of the mortgage was for xy years...the borrower was on interest only and repaid a large capital amount, and stayed on interest only for many years ( many years more than in the original contract, which was only supposed to be 2 years ). Now the manager in the financial institution has changed and even though the person is well "ahead of himself" in capital repaid, and is fully up to date with interest repayments, the financial institution say he is in arrears. His credit rating is probably the same as someone who has not made repayments at all. I do not think thats very fair, considering the financial institution has already been paid back much more than they would have been paid back by now had the person just kept up full monthly interest + capital repayments.

amgd28 said:

KBC used to have a facility (maybe they still do?) whereby you could lodge money against the capital sum of the mortgage, but retain the right to withdraw it again some time in the future. In the meantime the mortgage payments reduced proportionately (i.e. interest charged was on a lower outstanding balance and thus repayment was lower).

I thought it was a really good innovation - good for the banks and the consumer. Availed of it myself, putting 25k against my mortgage for a couple of years instead of in a low-yielding savings account.

As I said, not sure whether they still do this or not

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sounds interesting, but I would not expect other building societies / banks to offer this. In the particular case I know of, the borrower is even not looking for the capital he paid back. As he was on interest only, he is merely looking for it to be allowed as capital repaid in advance. He does not think he should officially be in arrears until that capital is "used up" against his mortgage.

If the bank gets their way on this, it will mean less people (who are fortunate enough to realise a lump sum of money through an inheritance, ,sale of other assets/ property, redundancy, lottery win or whatever ) will pay off part of their mortgage with it in the form of a large lump sum. That would be bad for the banks and for the economy.

If the issue of lump-sum repayments is not addressed in the contract then there's a good argument that the lender did the debtor a favour by facilitating his or her desire to make such a payment. If, as you say, the term was not changed then presumably the amount of the subsequent repayments fell to reflect the new lower outstanding balance. This contract was effectively modified with the consent of both parties to the original contract. Failing to adhere to the terms of the new contract by not maintaining the agreed level of instalment payments would therefore put the debtor in breach.

Solicitors may have different opinions on things but, I would think, the spectrum of opinion on such a particular legal matter from those who have actually gone over the contract will be substantially less than what you will find on the Internet from people who haven't. It's entirely up to you though it does appear possibly more important to you that you get agreement and support for your point of view. I think you would be better off with impartial, informed advice.

DebtCert said:

If the issue of lump-sum repayments is not addressed in the contract then there's a good argument that the lender did the debtor a favour by facilitating his or her desire to make such a payment.

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No, actually because the borrower was on a very good rate tracker mortgage, so the bank was considerably better off getting capital repayments in advance ( say 8 or ten years worth of monthly capital repayments ) rather than every month.
Thats because imho tracker mortgages, especially those on very low tracker mortgages, are loss making for the bank/building society. If a borrower pays off some or all of it early he is doing the bank a favour. If more people done that, the banks would not be in as much trouble. The banks should be encouraging it, not discouraging it?

DebtCert said:

If, as you say, the term was not changed then presumably the amount of the subsequent repayments fell to reflect the new lower outstanding balance.

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No, actually the amount of capital repayments per months billed before the lump sum payment was zero, and the amount of capital repayments per months billed after the lump sum payment - for a considerable number of years - 3 or 4 or 5, I'm not sure but it does not matter very much ) was zero. Interest repayments fell but the borrower kept up with them and kept them paid. The issue imho is about the capital repayments, not the interest.

DebtCert said:

it does appear possibly more important to you that you get agreement and support for your point of view.

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Not necessarily, I would be equally interested to know of any case where a borrower paid off capital and struggled subsequently. There must be at least a few people in the country who done that ( after inheritance, redundancy or whatever ) and it would be interesting to know the outcome.

Until its clear, some people who may be in a position to pay a lump sum off their tracker mortgage may not do it. Surely thats bad for the banks and the economy?

DebtCert said:

If the issue of lump-sum repayments is not addressed in the contract then there's a good argument that the lender did the debtor a favour by facilitating his or her desire to make such a payment. .

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What?

I have read this a few times and I can't make any sense of it. How can the lender be seen to be facilitating the debtor?

I regret if I did not express myself clearly. I was simply observing that in circumstances where the original contract made no provision for the possibility of the debtor wishing to pay a lump sum off the mortgage so as to reduce the outstanding balance but the debtor wishes to do so, then the creditor by acceeding to the request is facilitating that desire although there is no contractual obligation on them to do so. They are agreeing to amend the terms of the contract which is a contract both parties freely agreed to at the outset. It may also be in the interests of the bank to do so but it was the debtor who made the request and so I do not think its incorrect to describe the bank as facilitating the request.

DebtCert said:

I was simply observing that in circumstances where the original contract made no provision for the possibility of the debtor wishing to pay a lump sum off the mortgage ...

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Should'nt the "contract" have made this provision...after all its not unknown for borrowers to pay lump sums off their tracker mortgages if they "come in to money" ( eg by selling other assets, inheritance, redundancy, pension lump sum, lottery win or whatever).

DebtCert said:

If the issue of lump-sum repayments is not addressed in the contract then there's a good argument that the lender did the debtor a favour by facilitating his or her desire to make such a payment.

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I'll still disagree with you that in the case of this tracker mortgage, the bank "did the debtor a favour" in this case by accepting 9 or 10 years monthly repayments in one go, and then after 5 years or whatever saying he is in arrears. The borrower is not looking for the money he overpaid to be repaid...he is simply wondering is it right that he is officialy described by the bank as being "in arrears", even though he has kept all interest paid up to date, and has overpaid capital. His credit rating is probably affected.
After requesting all of the borrowers lump sum, the bank is financially much better off than if it had been paid monthly repayments as per the original "contract". I think the bank done itself "a favour" more than the debtor.

DebtCert said:

it was the debtor who made the request and so I do not think its incorrect to describe the bank as facilitating the request.

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I do not think he formally requested anything. The debtor / borrower paid 8 or ten years monthy capital repayments in one go, in the form of a lump sum. This was mutually agreed as to how the capital would be paid off. In fact once the bank became aware that the borrower had a lump sum, they wanted as much of the lump sum as possible, and persuaded the borrower to pay the entire lump lump / proceeds of the sale of the other property. There was no monthly capital repayments billed for in the years prior to the lump sum being paid off or for a number of years after the lump sum was paid.

Now the bank manager has changed...the borrower is still well "ahead of himself" in terms of money repaid...so what happens if the borrower is still struggling subsequently? He has paid off well more than half the capital amount of the mortgage and made all interest repayments, even though not even half of the term of the mortgage has expired yet! Is he in arrears? This raises interesting questions. Was in in arrears 3 or 6 months or 2 years after he paid the six-figure lump sum? If he is in arrears what do you call someones position who, unlike the borrower in this case, has not repaid capital and interest to date?

I am not interested in an engagement based on a slow drip-feed of the facts and don't have anything substantial to add to what I have already said.

DebtCert said:

I regret if I did not express myself clearly. I was simply observing that in circumstances where the original contract made no provision for the possibility of the debtor wishing to pay a lump sum off the mortgage so as to reduce the outstanding balance but the debtor wishes to do so, then the creditor by acceeding to the request is facilitating that desire although there is no contractual obligation on them to do so. They are agreeing to amend the terms of the contract which is a contract both parties freely agreed to at the outset. It may also be in the interests of the bank to do so but it was the debtor who made the request and so I do not think its incorrect to describe the bank as facilitating the request.

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Sorry Debt Cert, this makes no sense to me at all.

If you have a variable rate mortgage on your home, you have the right to pay money off it at any time without penalty.

This is in the Consumer Credit Act. The bank does not have a choice. The mortgage contract is irrelevant.

The contract, as such, is not changed.

If you have a fixed interest rate contract, the bank would be facilitating you if they did not charge an early repayment penalty, but that is not the issue here.