How to lighten your mortgage load
AS THOSE IN severe financial difficulties try and make sense of the recently-published Personal Insolvency Bill and what it might mean for them, new initiatives aimed at alleviating the burden of those whose position is not as precarious are coming to fruition.Something has to be done to resolve the issue of people falling behind with their mortgage repayments. AIB recently disclosed that the percentage of its mortgages in arrears of 90 days or more continues to rise and is expected to do so until next year at least. And for many in financial straits, opting to go bankrupt to deal with their debts might prove unpalatable – and not just to them but to the banks as well.
As a result, the Central Bank has been engaging with the banks over the past year or so with regards to their Mortgage Arrears Resolution Strategies and, as this process comes to a conclusion, banks are getting ready to launch new products in a “testing phase”.
But are these initiatives likely to represent a decent solution, or is it just another example of an attempt to dodge the reality of today’s property market and for homeowners and banks alike to realise their losses? And are some banks offering better products than others?
For the indebted homeowner, a split mortgage could offer a much-needed solution, allowing them to stay in their home while at the same time taking away the monthly pressure of meeting mortgage repayments. Whether it works or not will depend on a number of factors.
A split mortgage involves a borrower splitting a mortgage they are finding difficult to repay into an affordable mortgage, which they continue to repay, and “warehousing” the balance. But how is the affordable element to be determined?
According to the Bank of Ireland, the split between the two portions will be decided based on the affordability level of the customer and, as suggested in the Keane report of last year, it could be determined based on a percentage of the homeowner’s income.
So if, for example, a household’s income is currently €40,000 then, based on a 40 per cent affordability criteria, they might be able to afford about €1,000 a month (from an after-tax income of €2,528 a month) in mortgage repayments. If the homeowner finds that they can afford to repay more, perhaps through an increase in income, they could then transfer more funds from the warehouse to the mortgage to be repaid.
In a best-case scenario, the homeowner’s income will increase and they will gradually transfer all the mortgage that is warehoused into the part of the loan that is being repaid. This means that they will own their own home outright at the end of the term – it might have just taken them a little longer and been a little more expensive than otherwise.