Property Investor

Escaping overseas in an attempt to avoid paying debts is unlikely to work. It is better to negotiate a deal with the lender if you can

IT IS NO longer unusual to hear about property owners in hock to their bank “doing a runner”. With pay cuts and job losses now affecting an increasing number of borrowers, some people have gone abroad because they cannot meet repayments on rental properties or mortgages.

It is difficult to know whether any of those jumping ship believe that they can get off the hook by moving overseas. The reality is there is no easy escape. Debt travels with the borrower until it is paid off. And banks can pursue the borrower in other jurisdictions even if homes are repossessed and sold.

Ireland is one of the worst countries in Europe in which to be indebted because we have fairly penal laws on debt and bankruptcy for the individual (as distinct from a company). That is because they have not been updated to reflect the changed financial landscape. The Government is expected to come under pressure as part of the IMF bailout to bring these laws into line with more progressive EU countries but with a more pressing legislative programme to be attended to first there is little prospect of much happening for a considerable time. While the official statistics still show surprisingly low levels of foreclosure in Ireland, even though over 33,000 mortgage holders are more than three months in arrears, the suspicion is that banks don’t want to rock the boat while waiting to be bailed out.

It is also true that banks do not want to be lumbered with properties in negative equity – especially as there are more than 300,000 of them – or homes on which the mortgages have not been paid. In the past bank policy was to try and get the borrower back on track even if it meant that the loan had to be restructured to allow lower monthly repayments or interest only.

Unfortunately this has not been the experience of some professional advisers acting for distressed borrowers. Property expert Anthony Murphy of solicitors Regan McEntee says borrowers should not allow themselves to be browbeaten into unmanageable arrangements as a full default is in no one’s interest. The first instinct for borrowers is to hide as many assets as possible or transfer them to spouses. This often made lending institutions more intransigent. He recommends that borrowers be as above-board as possible but to take a hard line on shared pain when negotiating.

Murphy said that in the 1980s banks were willing to talk and a compromise could usually be reached. “In today’s climate it seems impossible to find anyone prepared or authorised to cut a deal. The result is that, in the absence of negotiations, borrowers see themselves as having no option but to hide everything and then stonewall. As they see it there is no incentive to come clean if a manageable deal is not achievable.”

It is in the best interests of all, including the taxpayer, that those in default of loans should stay at the negotiating table, however difficult, and try to hammer out a deal. The Trim solicitor advises clients “not to panic, act quickly, be clear that all will suffer some pain and do not sign up to anything if you cannot deliver or it does not allow you to move on”.

The indications are that a high proportion of borrowers in difficulty are investors who have been affected by much reduced rents , longer void periods or the ending of interest-only arrangements. Frank Conway of the Irish Mortgage Corporation says that in one case an investor with two rental properties has a three-fold increase in repayments as his interest-only period expires. In another instance, a businessman whose company has gone into liquidation is now living off rents from three apartments and, with no other source of income, is not paying his mortgages.

For those who want to come to an arrangement with their bank, Irish Mortgage Corporation offers a mortgage negotiating service for €500. Murphy says the benefit of having a professional negotiate is that creditors will more readily buy into a scheme when they feel that it is comprehensive and well planned.