Options for dealing with an unsustainable mortgage

Brendan Burgess

Brendan Burgess

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This is a long thread which sets out all the options facing someone with an unsustainable mortgage. I will be editing the thread in the light of feedback,so please check back if you are taking any action based on these threads.

While it is a long thread, it can still only summarise the options. Research them in depth yourself before taking any action as a result.


Case study to illustrate the points

· We are married with three children.
· We lost our jobs in Jan 2010
· Our employment prospects are poor as We are both in the construction sector
· We have a mortgage of €400,000 on a SVR of 4.5%
· Our house is worth €200,000
· We used up their savings for about a year to keep up the repayments
· We engaged fully in the MARP and have had various moratoriums, interest-only periods etc.
· We have built up € 20,000 in arrears
· We are getting Mortgage Interest Supplement of €12,000 which does not cover the €18,000 interest.

Options

  • Take no action
  • Apply for a split mortgage
  • Apply for a Personal Insolvency Arrangement
  • Agree to sell the house at a shortfall
  • After selling the house, apply for a Debt Settlement Arrangement
  • Sell the house through the Mortgage to Rent Scheme
  • Hand back the keys
  • Opt for bankruptcy in Ireland
  • Opt for bankruptcy in the UK
 
[FONT=&quot]Take no action [/FONT]
[FONT=&quot]I do not recommend this option, but I list it out here as it is one to consider and we can deal with the advantages and disadvantages of it.

[/FONT] [FONT=&quot]The bank is getting €12,000 per month in MIS so it might be happy enough with this situation. If it repossesses the house, it will get only around €9,000 interest on the relending of the €200,000 proceeds. There are many mortgages on which it is getting nothing, so the bank may well be happy with this. [/FONT]

[FONT=&quot]Even if the bank is not too happy, what can they do? They can phone you three times a month and you can tell them, politely, that your situation has not changed and you have no money to pay them. Under the current legislation, they can’t repossess the house, although this is expected to change soon. [/FONT]

[FONT=&quot]Even when they take action, it will take them a few years to get a repossession order and to evict you. [/FONT]
 
[FONT=&quot]Apply for a split mortgage [/FONT]
[FONT=&quot]There is little point in applying for a split mortgage now. You have no realistic prospects of being able to make the repayments on a sustainable mortgage of €200,000 at present. [/FONT]

[FONT=&quot]However, when one of you gets a job, you can apply for a Split Mortgage if you can meet the repayments on €200,000. [/FONT]

[FONT=&quot]The ptsb split mortgage is detailed in [/FONT][FONT=&quot]this post[/FONT]

[FONT=&quot]Features [/FONT]
· [FONT=&quot]Your lender would split your mortgage into a Main Mortgage Account of €200,000 and a Warehoused Account of €200,000. [/FONT]
· [FONT=&quot]You would pay normal repayments on the Main Mortgage and interest only on the Warehoused Mortgage.[/FONT]
· [FONT=&quot]€200,000 @ 4.5% over 40 years would cost you €900 per month. [/FONT]
· [FONT=&quot]€200,000 @1% interest would cost you €170 per month[/FONT]
· [FONT=&quot]On a salary of €36,000, you could pay around €1,070 per month at a struggle. [/FONT]
· [FONT=&quot]If you salary improves, some of the warehoused mortgage would be moved into the Main Mortgage[/FONT]
· [FONT=&quot]You are always liable for the full mortgage balance – nothing gets written off. [/FONT]

[FONT=&quot]Advantages[/FONT]
· [FONT=&quot]You keep your house for the moment[/FONT]
· [FONT=&quot]Your repayments are manageable [/FONT]
· [FONT=&quot]Your interest is reduced by around €7,000 a year[/FONT]
· [FONT=&quot]You are actually making capital repayments so your mortgage is reducing [/FONT]
· [FONT=&quot]If house prices increase, you could eventually escape negative equity [/FONT]
· [FONT=&quot]If you keep up the agreement and if your income improves, you could eventually pay off the mortgage and own your house mortgage-free [/FONT]
· [FONT=&quot]Your credit rating will recover after a few years [/FONT]

[FONT=&quot]Disadvantages [/FONT]
· [FONT=&quot]You will be in negative equity for a long time to come [/FONT]
· [FONT=&quot]You will be struggling for a long time to come[/FONT]
· [FONT=&quot]If your income increases, your repayments will increase[/FONT]
 
[FONT=&quot]Apply for a Personal Insolvency Arrangement [/FONT]
[FONT=&quot]You are not in a position to apply for a PIA now as you have no income with which to service it. But when you do get a job, you could apply for a PIA. [/FONT]

[FONT=&quot]Key Features [/FONT]
· [FONT=&quot]Your lender would have to agree to it and probably wouldn’t. [/FONT]
· [FONT=&quot]It would last 6 years [/FONT]
· [FONT=&quot]Your mortgage would be reduced to the current value of the property – €200,000[/FONT]
· [FONT=&quot]If you maintain the Arrangement for the 6 years, the shortfall and all other outstanding unsecured debts would be written off. [/FONT]
· [FONT=&quot]However, if you sell the house at a profit in the future, the increase in value would be clawed back by the lender [/FONT]

[FONT=&quot]Comparison with a Split Mortgage[/FONT]
· [FONT=&quot]You get to keep your house under both a PIA and a Split Mortgage[/FONT]
· [FONT=&quot]With a PIA, the amount which you cannot repay gets written off after 6 years, abd although there is a clawback if you sell the property, your repayments will be based on the reduced amount. Under a Split Mortgage, you remain liable for the full mortgage for ever.[/FONT]
· [FONT=&quot]If you have other creditors, under a PIA, these get written off after 6 years as well. Under a split mortgage, you would have to negotiate separately with them and they probably would not agree.[/FONT]

[FONT=&quot]So why not just go for a PIA? The main reason, is the the lender can veto it. They may well veto it and offer you a Split Mortgage instead. [/FONT]
 
[FONT=&quot]Agree to sell the house at a shortfall [/FONT]
[FONT=&quot]If your mortgage is completely unsustainable and a Split Mortgage on the current value of the home would also be unsustainable, you can seek the bank’s agreement that you will sell the house in an orderly manner [/FONT]

[FONT=&quot]Key Features[/FONT]
· [FONT=&quot]You get to stay in the house until it is sold [/FONT]
· [FONT=&quot]The bank issues you with letter to say that the mortgage is unsustainable [/FONT]
· [FONT=&quot]The Local Authority should assess your housing needs immediately [/FONT]
· [FONT=&quot]The house is sold for the maximum possible price [/FONT]
· [FONT=&quot]You will rent from a private landlord[/FONT]
· [FONT=&quot]The Local Authority will pay you Rent Supplement, assuming you qualify[/FONT]
· [FONT=&quot]You will still owe the bank the shortfall – in this case €200,000, but this is an unsecured debt. The various options for dealing with this are dealt with in this [/FONT][FONT=&quot]Case Study[/FONT]
·
[FONT=&quot]Disadvantages [/FONT]
· [FONT=&quot]You lose your home – might not be a big issue if you want to relocate for a new job[/FONT]
· [FONT=&quot]You still owe the bank a shortfall – you should be able to deal with this through bankruptcy or a Debt Settlement Arrangement – but you could be liable, in extreme circumstances, for up to 18 years. [/FONT]
· [FONT=&quot]There could well be a gap between vacating your home and getting Rent Supplement. During this period you will be homeless or staying with friends or family.[/FONT]
· [FONT=&quot]You may not be able to get a decent house for the amount of Rent Supplement you are offered[/FONT]

[FONT=&quot]Advantages [/FONT]
· [FONT=&quot]You could well be debt-free within 6 years, or earlier if you go to the UK[/FONT]
· [FONT=&quot]You won’t be struggling for years in negative equity [/FONT]
· [FONT=&quot]The lender might not pursue the shortfall or might agree a short settlement period on it in return for your co-operation[/FONT]
 
[FONT=&quot]After selling the house, apply for a Debt Settlement Arrangement [/FONT]
[FONT=&quot]As part of the new Insolvency Act, insolvent people who do not have secured debt, can apply for a Debt Settlement Arrangement. [/FONT]

[FONT=&quot]Features[/FONT]
· [FONT=&quot]You cannot have mortgage debt, so you can’t apply until you have sold the house[/FONT]
· [FONT=&quot]You agree to pay what you can over a period up to 5 years, after which your debts are cancelled [/FONT]
· [FONT=&quot]While the maximum period is 5 years, you can and should apply for a much shorter period e.g. 3 years to make it comparable to bankruptcy[/FONT]
· [FONT=&quot]You can function normally i.e. you can keep your bank account, credit cards etc – assuming the banks don’t withdraw them.[/FONT]
· [FONT=&quot]After the 5 years, or 3 years, all remaining debt is written off and you get a fresh start[/FONT]


[FONT=&quot]It is important to note that 65% of your creditors have to approve it, so a large creditor such as your bank may well veto it [/FONT]
 
[FONT=&quot]Hand back the keys [/FONT]
[FONT=&quot]This option is included for completeness. It is rarely a good idea, and should only be considered as a last resort. If the bank won’t engage with you or won’t agree to allow you to sell the house, then you may have no option. [/FONT]

[FONT=&quot]Key Features[/FONT]
· [FONT=&quot]The bank will sell the house at a lower price than you would have got[/FONT]
· [FONT=&quot]You will be liable for all the bank’s costs in maintaining the house and in selling it. [/FONT]
· [FONT=&quot]You will still be liable for the shortfall between your mortgage and the selling price[/FONT]

[FONT=&quot]Disadvantages over agreed sale of the house[/FONT]
· [FONT=&quot]Your shortfall will be higher [/FONT]
· [FONT=&quot]You could be liable for the shortfall for up to 18 years. This period will not start until the house is sold, which might take a few years [/FONT]
· [FONT=&quot]You are less likely to get any favourable treatment on the shortfall from the bank[/FONT]
· [FONT=&quot]You won’t be able to apply for a Debt Settlement Arrangement until the bank has sold the house.[/FONT]

[FONT=&quot]Even if you have to vacate the house because you are moving for a job or for whatever reasons, you should seek to avoid handing back the keys. You can tell the bank that you have vacated the house and that you are not making any further payments. But tell them that you will continue to act responsibly in terms of trying to sell the house and that you will maintain it in the meantime. [/FONT]
 
[FONT=&quot]Opt for bankruptcy in Ireland[/FONT]
[FONT=&quot]Under the new Personal Insolvency Act you can apply for bankruptcy in Ireland. [/FONT]

Key Features
· [FONT=&quot]You will be debt-free after three years [/FONT]
· [FONT=&quot]There is a small possibility of a bankruptcy payment order for a further 5 years[/FONT]
· [FONT=&quot]It will be a simple enough business to apply for [/FONT]
· [FONT=&quot]You must be insolvent – i.e. your liabilities must exceed your assets and you must be unable to pay your repayments as they fall due [/FONT]

[FONT=&quot]Advantages [/FONT]
· [FONT=&quot]You can apply immediately – no waiting around for the banks to negotiate with you.[/FONT]
· [FONT=&quot]You won’t have to worry about selling the house – it will be disposed of for you[/FONT]
· [FONT=&quot]You won’t care about what price the house gets[/FONT]
· [FONT=&quot]You will be completely free of debt after only 3 years [/FONT]
· [FONT=&quot]The bank has no right of veto – the court decides whether you are bankrupt or not[/FONT]

[FONT=&quot]Disadvantages[/FONT]
· [FONT=&quot]The stigma of being a bankrupt[/FONT]
· [FONT=&quot]You won’t be able to have bank accounts or credit cards for three years. Should be easy enough to work around this if a relative opens an account in their name and gives you an ATM card and online access. [/FONT]
· [FONT=&quot]You may well find it difficult to open bank accounts in your own name for a long time afterwards [/FONT]
· [FONT=&quot]Potential employers may well have a problem with employing a bankrupt and some professions bar bankrupts from their membership. [/FONT]
 
[FONT=&quot]Opt for bankruptcy in the UK [/FONT]

[FONT=&quot]Features[/FONT]
· [FONT=&quot]You have to establish a Centre of Material Interests which means you have to be resident in the UK for around 3 months before you apply – this is rarely challenged [/FONT]
· [FONT=&quot]It lasts one year and you are then entirely debt- free[/FONT]
· [FONT=&quot]You have to move to the UK, which might or might not be viable for you[/FONT]
· [FONT=&quot]You don’t have to sell your home in Ireland, although it’s a lot cleaner if you sell your home first[/FONT]
 
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