Contrary to the political view it is always better to pay off mortgage debt sooner than later. It is always better to face the facts
Money Express with Jill Kerby
Is a long term, variable rate interest-only repayment deal with your bank the ideal way to pay off what is otherwise considered untenable debt?
The government seems to think so. Most TDs think so. The ECB seems to think so. And so, a long term interest only deal has been arranged and the c€31 billion IBRC promissory millstone (the bad loans of Anglo Irish Bank and Irish Nationwide) has been turned into national debt that will only be paid off in 40 years.
The government says this is acceptable because it secured a low, but floating interest rate and by the time the capital has to be repaid, the economy will have recovered and natural inflation will reduce the impact of the final payment for our children and grandchildren, whose tab it will be.
Perhaps. But if a deal like this is good enough for the taxpayer, is this the sort of deal you should be seeking with your bank right now if you too have untenable mortgage or other debts that you simply cannot pay on a capital and interest, shorter term basis?
if there was a chance that your bank would renegotiate even your mortgage debt once and for all, would the pluses outweigh the minuses?
On the plus side, a 40 year mortgage will always reduce the cost of a more conventional 20 or 25 year homeloan, whether paid on a capital and interest basis or interest-only.
For example, a €310,000 capital and repayment loan paid over 40 years at a tracker rate of say, 2.25% (0.75% ECB rate plus 1.5% premium) will cost just €976 a month compared to €1,325 over 25 years. However, the total interest cost of the 40 year loan is €158,586 plus the €310,000 oustanding capital. Over 25 years, you’d pay €94,600 interest plus the €310,000 a genuine savings of nearly €64,000.
If you paid only interest (at 2.25%) for the 40 years your monthly repayments would fall to just €581 a month but over the 40 years your total interest payments would rise to a whopping €279,000, and you would still have the €310,000 capital to repay.
And while inflation will have eaten away at the real cost of that capital loan, will you have (assuming you are still alive) sufficient savings or income to pay it off at year 40? Will your lender let you “roll-over” the loan? More to point, how would you feel if you had to sell the house to clear the debt?
All these figures assume that your tracker-like interest rate never changes. But how likely is the ECB rate to remain at 0.75%? This rate has been artificially suppressed by a prodigious amount of money printing and bond buying since 2008; it will go up.
A 4.25% interest rate (ECB of 2% plus a 2.25% premium) turns a very benign monthly repayment into a horror story: instead of paying €581 interest-only, you will pay €1,328 a month and your total interest bill over 40 years increases to €327,660. That original €310,000 loan ends up costing you €637,660!
This is the problem with the government’s new promissory note “mortgage”. The interest bill isn’t likely to stay at c€800 million a year and the total cost will not be as insignificant as they are suggesting. Meanwhile, there remains another €137 billion of national debt to repay, or rollover endlessly.
Contrary to the political view, it is always better to pay off mortgage debt sooner than later. It is also always better to face the facts: if your debts are so great that you need extraordinary refinancing deals…then you should also consider the default option and sue for the most favourable insolvency or bankruptcy deal you can get.
Ironically, the government hopes that our retail banks will agree to the new six year Personal insolvency Arrangement for customers with untenable mortgage debt – that is, a six year ‘receivership’ period in which as much secure and unsecure debt as possible is repaid, after which the remaining amount is written off at year six with the majority of debtors keeping their family home and able to move on, debt-clear.
It’s the deal they failed to negotiate with the ECB themselves, and one wonders how inspired the retail banks will be to agree to such terms with their own debtors. Will they prefer the drawn out, 40 year sort of ‘solution’?
Before you ever agree to a long debt deal, consider all the costs and consequences to you and your family. A good, independent financial advisor should be consulted before you ever sign up to any informal debt repayment agreement.
Meanwhile, we can only hope that the new Personal Insolvency Practitioners (PiPs) will be fighting tooth and nail for a fair deal for their clients later this year when the national insolvency service is open for business.
Debt serfdom – being forced to repay loans that were never sustainable in the first place for the rest of your life (and which your family may inherit) - is something I wouldn’t wish on my worst enemy.