Second mortgages

We are about to purchase a holiday home costing £170,000 (€215,855) against which we will be seeking a mortgage of between £50,000 and £60,000. Our principal residence is valued at more than £200,000 and we have an outstanding mortgage on it of £50,000. With the trend for interest rate decreases, we were surprised to find that interest rates for second homes are quoted at 4.75 per cent and greater. Is this the lenders' way of increasing margins or is there a Government directive that second mortgages cost more? Is there any good reason why a second mortgage should cost more?

B.O'C., Kerry

You are talking either about a second mortgage or remortgaging your existing property to finance your planned purchase. In my experience, both these types of mortgages tend to be offered at rates slightly in excess of those available on primary mortgages, all other things being equal.

Having said that, the Irish Banking Information Service assures me that mortgages are judged by the same criteria whether they are primary, secondary or a remortgage situation and that there is nothing to say such mortgages have to be more expensive.

These priorities are the type of property and the security, and depending on the judgment made on these two issues a loan should be offered at market rates.

Looking solely at the information provided in your letter, the figures seem to suggest the mortgage you seek is well within your compass and therefore should be offered at close to current market rates - around 3.99 per cent in general, although there is some variation.

The alternative, as one lender has already suggested to you, is to remortgage your existing property. As already stated, there is no particular reason why such a move should be cheaper than a second mortgage.

You ask whether there are any downsides to such a move? Not really, over and above the risks involved in taking out any loan. The primary concern might be the fact that a remortgage to fund this second property would use your primary home as its security in general, as this is the security for the existing primary mortgage. If the worst were to happen, it would be your primary home and not the holiday home that the lender would come after should you be unable at any time to meet your commitments.

The best advice, and something suggested by everyone to whom I spoke, was that you should shop around in what is a very competitive market. Your existing lender may know you and you may believe this is a bonus but, equally, such a lender may assume you will pay a premium to the devil you know rather than the devil you don't, so to speak.

The value of pension AVCs

I have been told that my AVC (additional voluntary contribution) pool will amount to about £27,000 upon retirement and after exercise of my lump sum entitlements and would yield an income of £1,500 a year. I feel this is a poor return, as I would have to live until 80 to draw down all of my fund, assuming no intervening growth. I would prefer to get control of this balance as I think I can get a better return. Is this possible? Will my case fall within the plans to liberalise private sector pensions?

If I cannot get a refund of my balance, I shall cease making any further contributions to the AVC fund. It is only now that some of the disadvantages of AVCs are becoming apparent. A span of years since their introduction shows the yields are not as positive as the glossy brochures indicated.

Ms S.T., Dublin

The issues you raise are important and the experience salutary, so I hope you will forgive me for truncating a long letter into the above salient issues.

There are a couple of things to note initially. Prime among these is the practical issue that the whole purpose of AVCs, as with main pensions, is to provide an income in retirement. The trustees have a duty to act in a prudent way to ensure the fund meets its requirements. As such, it may well be that you could better the income performance of the AVCs but then you might be prepared to take greater risks than the trustees of your occupational-based scheme are permitted to.

In any case, it is somewhat academic as you cannot get control of your AVCs simply because you do not like the look of the investment or trustee performance. For as long as you remain in the main occupational pension fund to which these AVCs are attached, you cannot retrieve the funds.

If you were to leave the fund altogether, perhaps by moving job from where you now are, you might then get control but only of what currently exists, not what might eventually accumulate.

Another point to consider is that, on current evidence, it is not unlikely that women will, on average, survive to be 80 or more. Your letter indicates that you plan to retire at 62. According to one actuary to whom I spoke, and assuming no knowledge about any individual health matters, the actuarial odds currently are that you would survive 23 years, or until you were 85.

However, everyone emphasised the same point. It is impossible to gauge the value - good, bad or otherwise - of your AVCs without knowing more about them than you provided. For instance, will the level of payment per annum - £1,500 you say - remain static over the years or will it increase, and if so, by how much? Will the AVC payments die with you or will some income rights revert to a spouse or some other person?

To cover briefly another point you raise, you will not be covered by the pension funds liberalisation recently unveiled by the Minister for Finance, Mr McCreevy.

Certainly, I would strongly recommend you take professional advice both over what is likely to be available to you from your AVCs and the consequences of any halting of AVC payments. You have a right to fairly extensive information from the fund administrators and from the trustees.

Finally, you raise a point about not being aware of some of the restrictions - I would say, rather than disadvantages - and of being disappointed by the return on investment. Such factors illustrate the importance of getting appropriate advice before embarking on such a move. When people first think about taking out AVCs, they need to know just what benefits they require.

Please send your queries to Dominic Coyle, Q&A, The Irish Times, 11-15 D'Olier Street, Dublin 2, or e-mail to dcoyle@irish-times.ie. This column is a reader service and is not intended to replace professional advice. Due to the volume of mail, there may be a delay in answering queries. All suitable queries will be answered through the columns of the newspaper. No personal correspondence will be entered into.