Options for restructuring your mortgage

Wednesday 05 December 2012 12.30
Banks will allow you to switch to interest only or may even give you a few months without payment
Banks will allow you to switch to interest only or may even give you a few months without payment

Are you struggling with your mortgage repayments? Here are the options banks consider when renegotiating with those in arrears or in danger of going into arrears

.At the end of August, the Central Bank, issued statistics on mortgage arrears and on what they called ‘restructured’ mortgages – these are mortgages where payment arrangement originally entered into are changed to suit the wallet of the customer, who in all cases will have fallen behind or is in danger of falling behind on their monthly payments.

There are two important things to remember if you find yourself in this category, well three in fact.

1. You are not alone. One in nine households are now in arrears or have had their mortgages restructured.

2. Don’t not tell the bank what is going on – tell them what is going on. They are expecting your call, or a call like yours and they are legally obliged to renegotiate. They cannot chase you to repossess your home after your first contact. They have got to enter into an alternative arrangement. If you don’t stick to your side of the bargain on the renegotiated deal, then they can initiate proceedings, but not for a year.

3. They financial statement the bank will get you to fill out before they consider your case is extremely detailed and may even seem like a gross invasion of your privacy. Just bite your tongue and provide the detail they require. The form is an income and expenditure form and they want to know the nitty gritty from the amount of money you spend on your phone, fuel and groceries, to gym memberships, salons, sports etc.

Debt forgiveness is a term many will be familiar with. It is common in the US where homeowners can chuck the keys back in the mail box and walk away from their debt. That is not the case here and the government has made it clear it does not the banks, especially the bailed out banks to go down this route.

It has other plans to deal with personal insolvency – new laws are likely to come into play next year to bring Ireland into line with the UK which has so-called Involuntary Solvency Agreements or IVAs.

For the purpose of your mortgage these are the options available.

Interest only

If you are on a capital repayment mortgage you will be paying for the cost of the house and the interest on the loan you took out to pay for that. Switching to interest only mortgage will reduce your monthly bill significantly. This is most common arrangement for those in difficulty. Some 25,000 of the 70,000 mortgages re-arranged have switched to interest only. Do remember however that the capital still has to be paid off and will be added to your repayments once you come off interest only. The bank is likely to limit the amount of time on interest only to one year or two.

Reduced payment (greater than interest only)

This is a monthly payment that includes the principle of the loan and some, not all of the interest.

Term extension

This, for example, could involve you extended the term of your loan from 25 years to 30 years. This will reduce your monthly payments. However you should remember that by taking longer to pay off your mortgage, you will actually end up paying more in the long run. So don’t think of this as a permanent solution, but a short term one. Switch back to your normal mortgage term when you can afford to.

Arrears capitalisation

Capitalisation means that the arrears are added to the outstanding balance of the mortgage and a new monthly repayment is calculated. You then pay the new monthly payment for the remaining term. The arrears will be spread out over the remaining term of the mortgage.

This might suit people who have suddenly lost their job and feel they will be able to get a job within a short space of time and just need a breather on their monthly payments.

Payment moratorium

This is known as a ‘mortgage holiday’ whereby payments are suspended altogether for a limited amount of time. Very few mortgages have been suspended by banks but it is worth knowning that this is one of the options. Of the 70,000 mortgages in arrears or restructured only 2,163 are payment moratorium.

Hybrid mortgage

This is a mixed mortgage with one part on a fixed rate and the other on a variable rate. Just over 3,000 people have rearranged their mortgage this way. For most people who are on a tracker rate, switching to a fixed would be more expensive as would switching to a variable rate so a combination of the two is unlikely to be cheaper.

Banks are obliged to discuss options with you to make payment terms more manageable but expect it to be a gruelling process.

Lenders will always look, in the first option, to rescheduling the payments rather than reducing them.

Banks will not consider debt forgiveness, but there are other ‘big picture’ deals to be done.

Negative equity mortgages

This are not being advertised, but some banks are willing to negotiate a new mortgage with you if you want to move home but find you can’t sell because your house or apartment is worth less than what you bought it for. A negative equity mortgage allows homeowners to sell but the shortfall in price will be carried over to the new property. This isn’t as nightmarish as it sounds. All property prices have collapsed, so perhaps you could find yourself moving to a bigger property for the same price as the apartment or home you bought two or three years ago but pay the same mortgage every month. This will suit young families who found themselves in an apartment they can’t sell and need more room for a growing brood.

Debt/equity swap

This is a possible solution banks are looking at as an alternative to repossession. This means the bank takes a stake in the home and repayments are cut or whereby banks will write off part of the loan that it thinks it will never get back and shares the profit if the owner sells at a profit at a later point. In the present climate however banks are unlikely to write off debt and may only opt for this in situations where they think the value of the property will be realised some way into the future – ie in prime parts of Dublin, Cork and other urban areas.