Mortgage or Investment – Use Your Lump Sum Wisely

It wouldn’t be a lie to say that after the recent harsh financial crisis that many of us if not all of us are broke and suffering financially. However there seems to be an increase in property sales on the property market.

If you are one of the lucky few that have a cash sum at hand, you could find yourself wondering what to do with it. Interest rates are at an all time low, so you might want to do something a bit more productive with your savings rather than leave it gather dust in a bank account.

Perhaps you have a mortgage and that money might clear away that burden pretty handy, but is it wise to clear it away?  Well this can depend of the type of mortgage you have.

Variable Rate

If you’ve got an expensive mortgage and come into quite a sum of money, than it would make sense to pay it off now that you can afford to do so, as more often than not you can save thousands by paying off your mortgage early.

It is very common knowledge that mortgages are a lot more expensive than they were lets say six years ago, they are also a lot more harder to get.

Let’s say that you are borrowing more than 80 per cent of the value of your home, with a variable rate mortgage, you will be service to an interest rate around 5 per cent. Now say that last week you bought your home with €200,000 that you borrowed. Let’s also say that you came into a significant lump sum, enough to clear away that debt. You’d save somewhere between €100,000 and €110,000 by using the lump sum to clear your debt.

By this logic is very sensible to use your lump sum to clear away your mortgage loans, but this is subject to your rate and you should check your rate before attempting to do so.

Tracker Rate

Now this type of mortgage might not apply to a lot of people as the banks stopped offering them to clients around 2008, however the interest rate on this type of mortgage can be quite low. In this case it doesn’t make much sense to pay off your mortgage early, as you won’t save very much. However if you expect your financial situation to deteriorate, then paying off your tracker mortgage makes quite a lot of sense in the long run.

The founder of the personal finance website the Irish Financial Review Frank Conway has said. “Interest rates are so low today; if you’re on a cheap tracker mortgage, I’d hold off using a lump sum to pay down your mortgage. You can deal with the Threat of interest rates pushing up the cost of mortgage repayments later.” This does not mean that the rates won’t change and if you find yourself facing a higher rate, Frank had this to say. “If interest rates start to rise, revisit whether or not you should use your lump sum to repay your tracker then.

Be Prepared

If you are about to lose your job, or are struggling to keep your head above water financially, it would not be very wise to invest your money, nor would it be useful to repay a cheap tracker mortgage.

Paying off a cheap mortgage, or even making a significant financial dip in your mortgage loan, however it is very wise to keep a small cash sum aside. People often underestimate their expenses and what they can afford, you need to be prepared, especially in this financial climate where prices are fluctuating and services such as private health insurance, property tax and education are on the rise.

Remember what I said earlier about mortgages being harder to get than 6 years ago? Well the same is true for loans. Banks are not lending as much as they used to, so if you unexpectedly needed money, it can be hard to find. For this reason we would advise setting some of your money aside for a rainy day.

As always if you are dealing with a large sum of money, it is very important to receive financial advice. Sometimes there can be a fee, but this helps safe guard your money from being squandered.

 

What is loan to value?

A loan to value (or LTV) refers to the amount of money you are borrowing for to buy a home in relation to the value of that homewhat-is-loan-to-value

All LTVs are expressed as a percentage and is calculated by dividing the sum being borrowed by the property’s value and then multiplying that figure by 100. Let’s take a simple example to show how an LTV would be calculated. Person A is a first time buyer who wants to buy a home valued €150,000. He has built up savings and only needs a loan amount of €120,000.

This means the loan to value on Person A’s mortgage would be 80% as shown below:

loan-to-value-example

The LTV is an important metric when it comes to mortgage lending it plays a role in the limit that can be lent to a borrower. The majority of lenders will only allow borrowers draw down a maximum of 90% LTV (that is 90% of the property’s value) with the remaining 10% given up front as a deposit. Most lenders also offer reduced variable interest rates to those who take out mortgages with lower LTVs. For example, KBC Bank has an interest rate of just 3.85% for customers who borrow at an LTV of under 60%1.

1Information correct as of the 9th September 2013

AIB first to defend its mortgage resolution efforts to Oireachtas

Allied Irish Bank was the first mortgage lender to face scrutiny from Government officials when the bank’s chief executive, Mr. David Duffy, attended a recent meeting regarding AIB’s efforts to resolve the mortgage arrears crisisAIB

The meeting between the Mr. Duffy and the Oireachtas Committee on Finance will be the first of several meetings where top banking officials from all the major lenders will have to discuss what they are doing for borrowers currently in arrears. In particular, the meetings aim to ensure that mortgage lenders are making genuine efforts to find viable solutions for those who are struggling to meet their repayments.

According to figures released by AIB, more than 4,400 homeowners have already agreed “permanent resolutions” with the bank. On top of this, a further 12,500 homeowners have been contacted to discuss potential solutions to resolving their outstanding mortgage debt. These agreed “permanent resolutions” were broken up as follows:

  •  2,579 had their current loan arrangement recapitalized
  • 1,677 had the term of their loans extended
  • 182 had engaged in voluntary sales with the likely expectation of a debt write-down on the residual debt following the sale of their home
  • Surprisingly, only 17 account holders have started a split mortgage arrangement with AIB. However, the bank says it has agreed 153 split mortgages with customers

During his speech, Mr. Duffy took the opportunity to say that there were a small proportion of people who simply won’t pay – even though they could afford to. He said that 2,000 accounts whose mortgages were in arrears had enough money in their deposit account to pay off what was owed.

New firm Pepper planning to offer split mortgages to Irish customers

An asset management company from Australia, Pepper Asset Servicing, intend to launch a ‘split mortgage’ product to mortgage borrowers who are struggling to keep up with repaymentspepper-split-mortgages

Pepper, who recently acquired GE Woodchester’s home loan book contains around 3,500 sub-prime mortgages, said it is to offer borrowers the option of availing of a ‘split mortgage’. This new type of mortgage product takes your current loan and splits into two parts. The main part, which is determined by the current state of their finances, continues to be repaid as per normal.

The amount left over is then ‘parked’ aside while the repayments on the other portion are being made. While other lenders considering the idea of offering split mortgages are planning to still charge interest on the entire amount borrowed, Pepper won’t be charging interest on the ‘parked’ portion of the loan. And this is not the only incentive the Australian lender will offering potential borrowers who move to them.

Pepper will reduce the split balance by contributing 5% of uninterrupted annual repayments toward the main balance. Should any customer want to pay off more than their repayments in a year, the bank will reward you by contributing 20 per cent of the total annual overpayment as credit against the split balance. However, not everyone will be accepted for a split mortgage from the company.

Every applicant is assessed for eligibility on a case-by-case basis and those who have been accepted will have their account reviewed every 3 years to see if their financial situation has changed.

Surge in mortgage approvals shows improvements for property market

There was some more good news for the property market as the amount of mortgage approvals this June saw an increase of nearly 9% on last June’s figuremortgage-approval

Just over 1,600 mortgage loans with a value of €280 million were approved in June – an 8.8% increase on the amount of approvals for the same month last year which shows that the confidence of the banks to lend is gradually improving. This figure should not be confused with the amount of people who actually availed of the loan offer for which figures have not yet been released.

Data relating to mortgage activity is analysed and regularly released by the Irish Banking Federation. The increase in approvals comes at a time when property prices across the country recorded their first annual increase of 1.2% – the first such rise since the end of the ‘boom’ in 2008. But while more and more people are getting approved, the average loan amount has gone down.

The average mortgage sum given to successful applicants last month stood at €174,675 – 2.6% lower than the average amount drawn down 12 months ago. Those looking to remortgage to reduced monthly repayments or get a top-up for home improvements were more likely to be disappointed. The success rate for a remortgage or loan top-up went down nearly 8% but the average value of such loan went up beyond the €100,000.

Lenders could soon ‘buyout’ tracker mortgages with write-offs

Lenders could soon be allowed to buyout tracker mortgages by offering borrowers debt write-offscurrent-tracker-mortgage-rates

A proposed change to Central Bank rules of conduct could allow banks to take tracker mortgages off homeowners in exchange for a debt write-off. As it currently stands, the Code of Conduct on Mortgage Arrears – the Central Bank’s set of rules by which lenders must abide – prohibits banks from touching the trackers of struggling homeowners.

However, if the Central Bank go ahead to change this, banks will then be allowed to offer write-offs to people who give up their low-interest tracker loans. This amendment is to be formally announced in a fortnight’s time with the regulator seeking opinions on the change from the wider public. Around 375,000 mortgage holders with tracker rates have benefited from several cuts to the European Central Bank rate.

While this is good news for these customers, trackers have become loss-making for banks. This rule change would facilitate both the banks and distressed mortgage holders. It would allow those in trouble to engage with the bank to broker a deal on their loan while allowing the banks to minimise losses on its tracker mortgages.

Central Bank governor urges banks to tackle mortgage arrears

The Central Bank has vowed to get tough on banks not doing enough to help customers in mortgage arrears

Central Bank Mortgage Arrears

Mortgage arrears have reached ‘extraordinary’ levels that have never been seen before according to the Central Bank of Ireland’s governor, Patrick Honohan. He has promised that the Central Bank will keep in constant contact with lenders who are not doing enough about their mortgage arrears.

Attending as a main speaker at a Central Bank conference on the issue of distressed property markets this week, Mr. Honohan highlighted the importance of banks to show responsibility in being vigorously proactive in contacting mortgage holders who have fallen behind in their repayments. He mentioned the use of debt write downs as a solution, but only for people who are ‘truly over-indebted’ or facing insolvency.

An applied approach by the banks can be positive for both the bank itself and the borrower as to avoid having to go through the costly and laborious process for personal insolvency arrangements (PIA). From a cost perspective, it is better for a lender to amend loan agreements with a borrower as opposed to banks bearing the additional cost of going through the PIA process.

However, Mr. Honohan admitted the prospect of repossessions, in particular properties owned by investors, is very real. But while there will be concessions for people who cooperate with their bank in resolving their debt, those who don’t make genuine efforts to tackle their mortgage arrears will face consequences.

Increase in mortgage approvals showing activity in housing market

Mortgage approvals in November 2012 up 38% on previous years

Mortgage experts have welcomed a recent jump in the number of mortgages being approved by Irish institutions and may suggest the first steps in a property market recovery. The most recent figures from the Irish Banking Federation (IBF) relating to activity in November 2012 showed that just over 2,000 loans were approved – a 38% increase from the same month in 2011.

2012 has been a buoyant year for people taking the plunge and buying property. The number of mortgages offered during the January 2012 – November 2012 period went up by 12% to over 16,340. While the increase in mortgage applications was helped by the Government’s Mortgage Interest Relief scheme, many of those approved for mortgages in November would not have completed the mortgage process in time to beat the 31st December deadline.

Indeed, there seems to be demand for mortgages. Permanent TSB have announced they are to allocate €350 million this year for mortgage lending – a sign that PTSB have confidence in the market going forward. Despite the recent pick-up in loan approvals, ratings agency Fitch is predicting a further 20 percent drop in property prices this year. Even so, experts are confident of continued rises in mortgage approvals, especially among first time buyers.

Permanent TSB making €350 million available to first time buyers

PTSB aim to loan out €350 million worth of first time buyer mortgages in 2013Permanent TSB

Mortgage lender Permanent TSB is putting aside up to €350 million in a bid to increase lending to first time buyers. Funds for lending are coming primarily from its customer’s deposit accounts which have a combined value of €12 billion. This money could secure 2,000 new mortgages for a property market starting to show some encouraging signs of price stabilisation.

This commitment to lend is a far cry from last year when it lent next to no first time mortgages. It also had the issue of getting on top of its troubled residential and buy-to-let mortgage books two years ago. But it now seems that PTSB has enough confidence in the property market to go back to mortgage lending again. First time buyers will have to give a 10% deposit, a bit higher than the 8% demanded by Allied Irish Bank.

However, any first time buyer who lends from PTSB will benefit from one of the lowest variable rates available on the market – 3.99%. But, this introductory rate is only available for the first year of the loan term and changes to 4.33%, a rate which compares well to other mortgage lenders. With KBC and EBS Building Society also re-entering the market, 2013 could very well be an eventful year for the first time buyer mortgages.

Permanent TSB and EBS to start mortgage lending again

Mortgage banks PTSB and EBS will soon begin lending again

First time buyers will soon have a greater choice of mortgage lenders to choose from. Two lenders, EBS Buildings Society and Permanent TSB, have announced that they will restart giving out loans to first time buyers and house movers. This is good news for those looking to get their foot onto the property ladder. It will also add much needed competitiveness to the mortgage market.

At the moment, only AIB and Bank of Ireland are lending mortgages to first time buyers and movers. Indeed, many lenders stopped giving out loans due when demand for property dropped dramatically several years ago. However, demand for mortgages has picked up especially in the second half of this year. Figures from the Irish Banking Federation reveal that around 4,000 mortgage applications were approved during the months of July, August and September.

The above figure is a 10% jump in successful applications for the same three months in 2011 and a 23% increase on the amount of mortgage approvals in the second quarter. Overall, 2012 has been a good year for mortgages – it has been the first year since 2006 that the number of mortgages drawn down has increased. And it seems that this increased demand has encouraged EBS and PTSB to return to the market.

PTSB are planning to offer mortgages again sometime in the New Year. But, EBS is already one step ahead by officially declaring it is now ‘open for mortgage business’. When PTSB and EBS recommence mortgage lending, it will boost the number of active mortgage lenders from four to six.