Retired couple fret over looming loan repayment

We are a retired couple with limited income and no assets other than our home. We have a tracker mortgage of €53,000 due for full repayment in 12 months. The mortgage (which is up to date) has recently been sold by the lender to an outside company as part of a parcel of “unsustainable” loans.

We have been offered a loan of approximately €50,000 to clear the mortgage.

Would the loan-servicing company be open to an offer of that amount to clear the loan now and if so, how should it be approached?

Mr M.M., email

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Your fundamental question is whether a loan-servicing business will consider a discount for an up-front payment, and we will get to that, but this query sets off all sorts of little alarm bells.

First up, you say the loan is paid up to date but it has been sold by the lender as part of a package of “unsustainable loans”. This suggests everything is not quite right with this mortgage.

It is not impossible for what are called “performing loans” to be included in such transactions. Where they are, however, it would suggest the bank suspects that while it may be performing now, it is likely to run into trouble.

And I think it is quite clear where the trouble could emerge, if it hasn’t already. You say that you are both retired and have both limited income and no assets of note outside this family home.

That's not unusual for retired people. In the private sector in Ireland, more than half of workers still expect to rely on the State pension when they retire. Well, that's not strictly accurate. It's not that they expect to retire on the State pensions, most don't, but they take no steps to ensure they have any other income streams or assets on which they can rely.

Depending on your working income, a State pension of €13,425 (including the Christmas bonus) for a single person, or up to €25,455 if you include the additional payment for a qualified adult once they turn 66, might be a perfectly acceptable replacement income in retirement. But that does assume you have no outstanding debt.

Even for those on a private pension, the monthly payment can be low because of the amount invested or adverse investment returns.

There’s a reason lenders, as a general rule, will not allow the repayment term of a mortgage to extend beyond the State retirement age: they are fully aware that the potentially sharp reduction in income once you retire can create potential problems with meeting the loan repayments.

There is nothing to stop people retiring early of course, but, if they are weighing that up, the ability to meet outstanding debt must be a prominent factor in any assessment.

And, for most of us, €50,000 is a substantial debt. Making monthly payments against it can be relatively painless while we’re working – and have the option of taking on additional work if needed. When we’re retired and, in your own words, on limited income, it’s not the sort of thing we want hanging over us.

You say the entire outstanding sum of €53,000 is due this time next year. That would seem to indicate you are currently on an interest-only arrangement, which might explain why the loan is currently up to date. I can’t be sure of that, obviously, but it is one of the few scenarios that makes sense.

An interest-only arrangement on a debt that is outstanding into retirement for a couple with no other liquidatable assets and limited income points to a restructured mortgage. And while that is by no means unusual for people who were badly hit financially and employment-wise during the financial crash and the Covid-19 lockdown, it does point to a damaged credit rating.

Which brings us to this €50,000 loan.

Sourcing a loan

You don't say where it is from or over what period it is expected to be repaid but there are four options for this borrowing – a loan from a bank or credit union; money offered by family or friends; equity release; or borrowings from specialist impaired credit lenders.

All would get you over the “hump” of this looming deadline but that is about the only positive.

I very much doubt at your age and in your financial position that a bank would be willing to extend that amount of money. Or a credit union. And even if they did, the interest rate you would be paying would be far in excess of what you are paying on a mortgage. Yes, it would be for a longer period but that just takes away the looming deadline and leaves you financially exposed for the rest of your life.

According to Bonkers.ie, the best personal loan rate you could get on a sum of €50,000 over a 10-year period – if you could persuade a bank to lend it to you over that term – would be 5.9 per cent APR, with a monthly payment of €547.60, at Avant.

That’s over a quarter of your family income, potentially for the rest of your lives. And, if your credit rating is indeed damaged, the interest rate – and the monthly payment – will be much higher.

Borrowing from companies that specialise in impaired credit would be more expensive again and, quite frankly in your position, should be avoided. Full stop.

If you are talking about a family loan, or borrowing from friends, the interest rate could be lower as, for now, they only have to charge what they could get on that money in a demand deposit savings account – which is effectively zero. The Government was looking at changing those rules last year in the budget to match market borrowing rates, which obviously would be much higher, but ultimately decided against it.

They did warn that it was something they would return to. However, the interest rates about to rise at the European Central Bank, and a burgeoning cost of living crisis anyway, I suspect Paschal Donohoe would be reluctant to do so this year.

But family loans can be uncertain arrangements and, depending on circumstances, could have unexpected tax implications. They certainly need to have a formal written underpinning to avoid any future misunderstandings.

Equity release

The last option is equity release. Again, my instinct tells me this is not the current source of your potential borrowing: if it was, I would have thought you just go for the €53,000 and have done with it.

As a rule, I am deeply sceptical of equity release. It involves either a company buying a share in your home for substantially less than its market value on the basis that they don’t get their hands on that share in your home until you both die, or, alternatively, a life loan where you borrow the money with no repayments until you die.

Neither are good value. In the first case, the only company offering the product in Ireland right now – Home Plus, which is owned by a business called Residential Reversions – itself gave an example of how it works, which saw them giving a couple who were 67 and 70 years old respectively a quarter of the market value of their home up-front in exchange for a 72 per cent share of the property.

So, if your home is worth €200,000, they’ll give you the €50,000 but own €144,000 of your €200,000 home.

With life loans, where the only Irish provider these days is a company called Spry Finance, trading as Seniors Money, the interest they charge on the money they give you is higher than a mortgage rate. And because it is rolling up as you are not making repayments, it can eventually amount to the full value of the property.

The only reassurance they give is that the loan will never cost more than the full value of your home.

Importantly, however, a life loan could stop you accessing Fair Deal funding should either of you need nursing home care at some point. That could present its own problems and stress.

Despite my scepticism, there are situations where equity release does make sense and your situation is certainly one where it might be considered. Yes, you lose a chunk of your home but you are able to live there without the worry about this financial debt hanging over you until you die.

Sure, it means there will be less value in your estate for any family that might inherit but that is very much a secondary consideration: your priority, with limited income and a significant debt, is to make the best decisions for your own financial welfare, not to live in penury and stress for the benefit of others.

If you were considering equity release, with the issue of potential nursing home care at a later stage in mind, I would favour the Home Plus option. With a life loan you still own the entire house but it is encumbered by the borrowings and, unless the HSE believes it can secure access to at least 22.5 per cent of the value of the home, you will most likely not qualify for the Fair Deal that you will require to fund nursing home care, although Seniors Money says that it has customers who have availed of Fair Deal.

The Home Plus up front sale of a portion of the home also has implications is you need nursing home care within five years – as Fair Deal might claw back the value of any assets sold or otherwise offloaded in the five years before you apply for State funding to help cover what are substantial nursing homes fees. But at least if you do not need care for five years after doing the equity release, you will be okay – as long as you still own 22.5 per cent of the home as this is the maximum portion of your home that Fair Deal funding will cost you.

Dealing with the debt

Assuming you do get the €50,000 in a way that is sustainable – or the prospect of it – will this loan-servicing group accept your €50,000 as full and final payment on your €53,000 debt?

There is no yes/no answer here. They can wait a year and demand the full amount so what is the benefit of accepting a lesser sum just 12 months earlier? They might be more open to doing a deal when the repayment date – and therefore the benefit to them in closing off the loan – was a bit further away.

On the other hand, their whole purpose is collecting debt owed. And if the option is between accepting €50,000 for a €53,000 debt now, or facing the prospect that they will get nothing in a year’s time because you simply do not have those sort of funds, there is a strong argument to say they should do a deal – and that they could be persuaded it makes sense.

How to approach them. There are two ways really – either through a solicitor if you are looking to make a one-off offer and want to make sure you do not leave yourself exposed to further recourse from this company at some point down the line, or by using the Money Advice and Budgeting Service (Mabs).

Mabs service

This is an excellent service, funded ultimately by the Department of Social Protection, and designed to help ordinary people find solutions to debt issues. Their website has detailed information presented in an easy-to-understand manner on how people in your position can approach lenders to sort out untenable debt issues.

It includes links to a protocol between Mabs and Banking & Payments Federation Ireland (BPFI) – which represents all the main lenders – on the framework for settling some of your debt if necessary. The loan-servicing group that is now managing your outstanding mortgage is a member of the BPFI so it should be operating under this protocol.

Importantly, among other things, the protocol precludes the creditor – the group managing your mortgage – from pursuing legal action against you while they are working through the process with you and the adviser Mabs will allocate you after you get in touch with them. Full details of how to do so are available on their website.

It should be noted that the Mabs route does not require you to borrow this €50,000 at all. It is very much predicated on you offering to repay what you can in line with your current financial circumstances. That likely will involve extending the repayment date on this €53,000 debt out over many years – potentially until you die – but it will avoid you having to take on new debt to sort it out.

As you can see, we’re doing quite a bit of guessing here, given the very limited information you have chosen to provide. The one takeaway I would hope you get from it is that, whatever else, you do not want to swap a sticky financial position with this mortgage for an even bigger problem with a loan to make that first headache go away.

Please send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street, Dublin 2, or by email to dominic.coyle@irishtimes.com. This column is a reader service and is not intended to replace professional advice