In the final part of this three-part series, John Lowe aka the Money Doctor establishes priorities and defines the end game to fix your finances.
You should establish your priorities in terms of debts and look at all your options. If you have an asset you can dispose of in order to reduce your borrowings, such as a holiday home you rarely use or even a second family car you should be prepared to swallow your pride and take the hard decision.
It may not be conducive to sell, either inability to sell or not attaining the right price. Your option here is to negotiate with the lender in the first instance. Deferring any further borrowings until your finances are back on an even keel is, of course, essential.
If you are sitting on any substantial level of savings it would make sense to use some of them to pay off your most expensive borrowings, particularly credit cards or personal loans. Also, if you are making monthly payments to a savings plan and you have sufficient Rainy Day Funds, you should consider suspending the plan for a period and diverting the payment in reduction of your debts.
If none of these are options, then you could consider consolidating all your non-mortgage borrowings either on the security of an asset e.g. your home or if allowable, in one unsecured personal loan and you can show the ability to repay.
Credit unions are still obliging thousands of customers once they have been able to prove repayment capacity.
If your mortgage is sufficiently low and you have good equity in your home, you may be able to convince your mortgage lender to let you top-up the mortgage over its remaining term. However such loans are getting more difficult to obtain with some of the bank lenders only accepting their own personal loans for limited consolidation.
Consolidation should be regarded as an ONCE-OFF transaction especially where homes are being used as security. When values were on the rise, loans of this type were easy to approve. We are now in different times.
The greatest priority for most of us must be to retain the family home and therefore maintaining mortgage repayments, no matter how small, has to be a must. Other lenders can take various legal steps against you and impair your credit rating by registering missed repayments with the Irish Credit Bureau but your mortgage lender is the only one who can repossess your home.
They have a legal charge against it.
If the warning signs are there in terms of an ever increasing overdraft or a credit card on which you make the minimum payment each month, now is the time to take action. Don’t wait until you’ve missed payments and the letters start to come through the letterbox. Ignoring communications helps no one, neither you nor the creditor.
With mortgages, all the lenders have an agreement with the Government in terms of how to deal with mortgage arrears and the various time limitations of pursuing legal action but this only applies where the mortgage holder is already engaged with the lender in relation to those arrears and is actively communicating.
Your mortgage lender will already have a dedicated section dealing solely with borrowers in arrears - one such lender’s department is euphemistically called Collections and Recoveries - or those who are struggling to keep up their repayments.
Early action by you can head off impending trouble and will also impress on the lender that you are determined to work your way through any problems.
Even in a hopeless situation with bankruptcy beckoning, the situation still has to be managed. Proactivity will certainly be a help.
DEFINE YOUR END GAME
Decide what you want to achieve, but also be realistic enough to know what is achievable.
Look at the trend in your finances over the last two years and determine if your current situation is temporary or likely to last for a number of years. Have you any source of additional income coming available in the next few years such as an inheritance, a maturing investment plan or endowment policy or anything of this nature?
Will any of your dependents become self-financing, will your partner be able to enter the workforce if unable to do so at the moment or will you yourself be able to develop any sources of additional income? Reinvention is fast becoming a buzz word in business circles.
In other words, if you are preparing to approach any of your lenders/creditors to negotiate with them, be sure that you can show them that, as far as possible, you have a plan that is realistic and achievable.
Part of this approach will be cash flows, budgets and any potential dreams and plans for the future that will repay their debts.
FIRST THINGS FIRST
Look at any short-term borrowings where the repayments are large relative to the size of the loan. If you can manage to extend the terms of these loans without attracting a higher interest rate or any punitive penalties, negotiate these first.
If you then decide to renegotiate your mortgage, it’s likely that the lender will give you their own version of an income and expenditure worksheet which you can complete from the Budget template you’ve already prepared.
Bank current account statements, all loan statements, insurance policies, savings accounts and investments including pension contributions will all be required by your lender.
Going to the initial requested meeting armed with all these facts and figures will show your lender how serious you are. If time allows you should also bring along a copy of your most recent Irish Credit Bureau report to corroborate the full extent of your debt.
It would also be essential that your spouse/partner, if applicable, accompany you to all meetings to show that you have a joint determination and solidarity in dealing with your problems.
WHAT TO EXPECT
Your creditor/lender will by now have developed a good level of expertise in handling these situations and will have a suite of tailored solutions to cover most scenarios.
The most likely financial solutions they will offer are:
- For mortgages, extending the term
- Interest only payments for 6 months, 1 or 2 years.
- A moratorium on all repayments - capital and interest - for a number of months
- A split mortgage, with one part 'warehoused' til the end of the term on a no-interest basis.
- A top-up mortgage/loan to allow you to consolidate all your other loans if you have both spare equity in the property and justifiable income.
The first option of extending the loan term could be attractive if it alleviates the problem – eases the cash flow and allows capital and interest payments to be continued. Age may preclude this term extension but you may have offspring prepared to join in the loan allowing for such an agreement to extend.
Bear in mind that if you are on a Tracker Mortgage interest rate, extending your loan may terminate your original loan contract and you may be forced to accept a standard variable or fixed interest rate. Your lender will always send you full details of any switch agreed. You will need to carefully read same.
Interest only for a period will obviously help as in many cases it can effectively halve your monthly payments. The saying you cannot make a silk purse out of a sow’s ear rings true –if you haven't got it, you can’t give it. So lenders are forced to at least grant interest only extensions for a set time. Obviously, this cannot go on for ever but while the property market continues to weaken and sales are flat, there is little choice for the lender currently.
Some of the lenders will not give further interest only extensions on home loans but WILL approve payment reductions – this effectively is tantamount to the same thing.
The third option of a moratorium on all payments is purely a very short-term solution and unless your problem is also short-term, e.g. due to an inheritance, will not really be of any assistance to you.
The final option of the top-up, if available, would be the optimum solution where additional funds are approved to consolidate other debts, possibly give you some upfront cash and gives you breathing space. In the present climate, this is probably the least likely as firstly all lenders have liquidity problems and secondly have enough impairments without potentially taking on more.
In the absence of a top-up, a combination of the first two would be most beneficial to you as it would extend the term of the loan and also give you the breathing space of interest only payments for the initial period.
GIVE A LITTLE
In any negotiation case, there is give and take. Your lenders will expect sacrifices to be made if you are looking to extend facilities with them. Just as in a new enterprise, prudent bankers like to see entrepreneurs invest their own money into the project before agreeing loan facilities, so too the debtor.
To sum up, if you have debt issues, these are the steps you have to take
- Communicate: Do not ignore creditor letters or calls. Placing your head in the sand will only prolong the agony.
- Check your income: Are there any other channels of income? If your employment has gone, or your business ceased, have you reinvented yourself? With financial commitments, they have to be serviced and income therefore has to earned. Dust off your CV, prepare that new business plan, create income. Jobseekers’ Allowance or Benefit should only be temporary.
- Check your expenditure: Do the analysis of your spending, prepare a full budget that you may need to show your creditors. Show clearly where you have made cuts and sacrifices. If you haven't got it, you shouldn't spend it.
- Give hope: If you have lost your job, ceased your business, you must have a plan that will at some stage recreate an income stream and recommence loan payments or fully pay off the debt. Declare your intention and put a time limit on the recovery yourself.
- Pay something: Even if your lender does not agree with your proposals, by choosing to either ignore demands or pay nothing at all will only escalate repossession or worse, prison.
If your interest only extension request is refused by your lender for example, you could cancel the lender’s direct debit and manually pay the interest each month on time. By making these payments, you stand a far better chance of leniency should the lender take you to court.
Finally, take independent professional advice. Take the example of golf professionals – they still have their coaches. You have lasted the course, now go fix your finances.
For more information click on John Lowe's profile above or on his website.