Irish Mortgage Brokers Blog

The aim of the new pensions framework is to deliver lasting security, equity, clarity and choice to the individual. To a degree we are taking on a system the Australians have used in which providing for your retirement is mandatory.

The aim is also to increase pension coverage, particularly among those who have traditionally had a lower level of uptake, as well as encouraging provision for retirement that is not reliant upon the state alone.

There were many innocent parties to the credit fuelled property bubble, they are generally those who didn’t borrow, or who carried no debt, choosing instead to live frugally, and if they used debt they used it wisely. Many of these people are at the polar ends of the age spectrum, very young (who don’t even have access to credit) or much older (who have paid off their mortgages), something we will all need to get used to though is the fact that everybody is going to pay for the mess left behind, this goes farther than NAMA.

The process I am describing is already under way, the very payments system (our financial infrastructure), is going to be used to generate economic rent from the people of Ireland in order to bring in more profit to banks so that they can repair their balance sheets. This price will be paid by the taxpayer outside of the bailout money already being supplied on our behalf. This will be even paid by people who manage to slip through the tax net (often because they earn very low incomes) but who use financial infrastructure.

Financial infrastructure is any electronic payments, our payment system, foreign exchange, ATM’s etc. The fees that banks will start to charge will in essence be like a toll-booth on the financial system for all people who interface with it. Free banking is going to be a thing of the past soon, or it will be heavily restricted to certain terms and conditions such as minimum balances/transactions etc. Two of the bastions of free banking have shut down within the last three weeks (Halifax & Postbank), these offerings were by a newcomer seeking market share (Halifax) and another that had state backing (Postbank which was a JV with Fortis and then BNP Paribas).

The remaining incumbents have no need to extend free banking, there is little reason because as fewer compete based on that premise it doesn’t become the factor that wins business, and as those that had free banking are forced out into the market to choose new banks they will do so for perhaps different reasons than their initial switch to free banks (such as proximity of branches, how good they gauge their online banking to be, availability of credit/overdrafts etc.).

Deposit rates will also come under scrutiny by banks, thus far depositors couldn’t be hit because they were too valuable to the banks as a capital base, this meant Irish banks happily paid over the odds to attract depositors, in fact, two of the best deposit products out there are (oddly) state sponsored, meaning that even our sovereign state is behind the drive to attract deposits with certain providers. However, as competition (in particular international competition that can funnel money out of the country) decreases there will be less of a requirement to satisfy retail depositors [note: institutional depositors have different rates and could be left unaffected], and as NAMA goes through, removing at least some uncertainty from the balance sheet, the decreased loan/deposit ratio will mean the end of the courtship of depositors.

Watch deposit rates drop in relation to their margin relative to the ECB, this trend has begun, it will continue.

Elsewhere margin will increase, on the costing side. In our annual trend forecast we were the first to put a number and time-frame on the line (always a mistake I’m told, either pick a figure or a time-frame but not both!), with an expectation of 100 basis points or 1% being added to the cost of variable rate mortgages in Ireland. While many felt this was ‘impossible’ because we are supporting the banks, today’s news would suggest otherwise. Mortgages will cost more even if the ECB leave rates unchanged in 2010, margins will increase and it is a question of who will move first. My own suspicions are that post NAMA one of the main two will do it, and this will be tightly followed (perhaps lead) by EBS or whatever the new ‘3rd force’ is.

The margin on lending won’t stop at mortgages, in fact, mortgages may be the last bastion to fall (public outcry centres heavily on mortgages), watch for increased margins on overdrafts, personal loans, car loans, credit cards issued by banks etc. This is the second level after infrastructure where rent seeking is easily satisfied.

Regarding credit in general, more forensic underwriting coupled with harsher terms/lower multiples are the order of the day, while there is business out there [this blog would cease if there were NO mortgages!] it is incredibly difficult to place successfully.

It is in the manners mentioned that everybody will pay, at every point in the financial infrastructure a cost will start to occur which is over and above opportunity cost and expense, that ‘rent’ will be one of the primary manners in which banks recoup their profits. There is such a focus on NAMA and not overpaying for the assets that nobody is watching how we will overpay for everything else. Consider yourself warned!

Dan Mitchell of Cato (and the Centre for Freedom and Prosperity) is a guy I enjoy speaking and listening to as well, he is a great Libertarian thinker and regular commentator on Bloomberg, CNBC, CNN and Fox News. Here are two of his latest video’s, the first is on debt and the second is about money laundering laws.

We got a mention in today’s Indo in the ‘Your Money’ section, the story is about the one year freeze banks
have on repossessions.

The article by John Cradden covers the main issues of the day in the repossessions arena as well as giving some great general advice on ways to protect yourself from potential rate hikes by lenders.

In this video Paddy Hirsch talks about Bonds, Notes and Bills helping to break down how debt is described based on its tenure and also a little about how they work. This is worth watching twice if you have heard ‘Government Bonds’ mentioned in the past but didn’t really get what they were talking about.

There is an interesting situation that we are seeing much more of lately, where people in negative equity or negligible equity are deciding that because they cannot now move up the ladder (which was the point in their initial purchase - as a stepping stone to trading up), they will instead rent out their home and then rent a house in the area they actually want to live.

While this is a working solution to a person in negative equity seeking mobility it can result in a tax liability that many people are not aware of, this is how it occurs, the portion of mortgage payment that goes against the capital is actually taxable, and if it is paid to the bank it doesn’t mean you don’t have to pay tax on it.

The finance act in 2009 brought about a change whereby only 75% of mortgage interest can be offset against Case 5 rental income as an expense, and this further exacerbates the situation even for those who have interest only loans!

However, we’ll demonstrate the position a person would find themselves in if they had a mortgage of €260,000 over 25yrs (costing €1,230 per month) and they rented the property out for c. €1,100.

Clients have told us they have gone ahead and done this, but that they don’t mind losing out on the €130 per month in order to live where they really want to be, that is when we have to explain the rest of the implication to them!

For a start, if you rent out your property within the first five years (if you didn’t pay stamp claiming First Time Buyer status) there can be a stamp duty clawback, but it doesn’t end there.

Within the €1,230 per month mortgage payment (TRS will no longer apply if you are renting the property out) there are two parts, €650 is interest and the remaining €580 is capital repayment. Only 75% of the €650 can be set off against the rent meaning that only €488 applies.

So your €1,100 rent minus €488 is the ‘profit’ you are deemed to have made which amounts to €612 per month and at c. 45%(ish) tax that means you’d have to pay Revenue €274 per month in tax on top of the €130 difference that it takes to make up the full payment.

This means that the monthly cost is actually around €400 (and this is made up of after tax income - so the gross cost is higher again- of course, we can advise people so that this doesn’t happen but often people don’t seek advice in advance and that means that even with our help they are facing a tax liability, for that reason we would hope that if you are considering this that you call first!

Other expenses that have to be considered are changing your home insurance to reflect that it isn’t a primary home any more, then there is the NPPR tax (non-principle private residence), as well as PRTB requirements.

If you have any questions call us, the main thing is to ensure that you don’t find yourself in this situation if you can’t sell your current home and want to move elsewhere!

The Financial Regulator recently brought out a new code of conduct for mortgage arrears, the full length eight page document is here.

The code applies to: all of the regulated mortgage lenders in the state (this includes the sub-prime lenders), as well as all mortgage lenders operating here via other EU states (eg: Leeds Building Soc.)

It applies to consumers only, and only in respect of their principle private residence in the state. The code should be treated as an extension of the Consumer Protection Code.

Scope: The code covers finance for primary homes, lenders must adopt flexible procedures that aim to assist the borrower as far as possible. It sets out what the lenders must do in an arrears case but allows repossession where the code is not appropriate (fraud, breach of contract, abandonment). It doesn’t relieve the borrower from their duties to repay

Legal Background: S117 of the Central Bank Act 1989

Avoiding an arrears problem: Once arrears arise the lender must promptly communicate with the borrower to establish grounds for same.

Handling an arrears problem: The lender must make every effort in correspondence by telephone, mail, or meeting to find a resolution. A plan for clearing the arrears should be made which is in the interest of both parties, all viable options must be considered. If a third payment is missed the lender has the right to issue a formal demand. At this stage the borrower must have been advised in writing of

1. The total amount of arrears
2. Any excess interest (as a rate or amount) that may continue to be charged and the basis of how it is charged, any charges payable and the basis of them.
3. Advice regarding the consequences of failing to respond - namely the risk of legal proceedings with an estimate of costs to the borrower of same.

If arrears persis the lenders has the right to enforce the agreement (repossess the property) however, they must wait 12 months from the time arrears first arose before applying to the courts (civil bill). The lender must notify the borrower when it commences legal action for repossession.

Addressing an arrears problem: Lenders can distinguish between those ‘unable’ to pay, and those who are ‘unwilling’ to pay. they must examine each case on its individual merits. Overall indebtedness must be considered. They should look into one or more of the following solutions -

1. An arrangement where the monthly payment is changed in order to address the arrears
2. Deferring payment of all or part of the instalment for a period if appropriate
3. Extending the term of the mortgage
4. Changing the type of mortgage if it results in reduced payments.
5. Capitalising the arrears and interest if it results in repayment capacity and if sufficient equity exists.

The borrower must be advised to take appropriate independent advice. Lenders must give borrowers clear explanations in writing along with costs/charges that may arise, they must continue to monitor the situation, the borrower must have a relevant contact in the lenders firm.

Where appropriate the lender should refer the borrower to MABS, at the borrowers request and with their consent the lender can liase with a nominated third party. the borrower should be made aware of all alternatives, trading down, voluntary sale, or refinancing elsewhere.

Repossession proceedings: A lender must exhaust every alternative before seeking reposseession, an abscence of engagement is considered grounds for this. It may also come about via voluntary possession, by the borrower notifying the lender, or via court order.

Even in a repossession case the lender must maintain contact with the borrower or their nominated representative. If agreement can be made the lender must enter talks and put a hold on proceedings if an agreed regular payment is maintained.

The lender let the borrower know that no matter how the property is repossessed and disposed of, the borrower will remain liable for the outstanding debt, including any accrued interest, charges, legal, selling and other related costs, if this is the case.

Retention and Production of Documents: A lender must keep and maintain adequate records of all the steps taken, and all of the considerations and assessments required by this Code, and must produce all such records to the Financial Regulator upon request.

I have maintained for some time that new world orders don’t occur overnight, and that even trends that may appear to be secular don’t necessarily work out if you extrapolate them into the future. Let me explain, in the 70’s everybody said Brazil was going to rule the world by the late 1980’s, they came up with all of the reasons for this, demographic, growth, the education and markets in place etc. then it just didn’t happen.

By the end of the 80’s when Brazil was meant to be the new world power they had been usurped, this time by Japan, now it was the turn of the Japanese to be ruling the world within the next 20 years, then far from taking over Japan imploded and they have struggled ever since.

Today we are told that it will instead be China who rule the world by 2020, and frankly, I don’t believe that this can happen without massive painful adjustment that would set them back years, and it also doesn’t accommodate for the fact that the USA views the world as having only one power, theirs, and they will find ways to dethrone any who stand to pass them by.

In this video there is some commentary you may or may not agree with, in terms of the bet on China, time will tell who is right or wrong, but it is important to remember that for every reason ‘for’ there is an ‘against’ and conversations on the Chinese economy are often lacking in the latter.

Last Saturday Charlie Weston (award winning Personal Finance editor with the Irish Independent) Karl Deeter (of Irish Mortgage Brokers) were on the Marian Finucane show on RTE 1 (audio here), during the show Karl mentioned a file with mortgage rate information on it that you could download. The file was a mid-sized pdf but they don’t embed easily in the existing site for the show so we are posting it on our site and RTE Will link to it instead.

The file in question is here or you can click on the image to the left, if you have any questions feel free to call us at the number which is at the top of every page on this site.

Thanks for listening and for your enquiries, we were delighted to have a representative from our firm on such a big show, we are huge fans and we hope our opinions offered some help to you, the listeners.

Sincerely,

The Team at Irish Mortgage Brokers

Unless you are a cash buyer it isn’t a good idea to focus on property as a single cost, in a transaction there are two costs, that of the asset and then that of the finance for the asset purchase. I have done a few comparisons on costs where in two years time where a property has fallen a further 20% from where it is today.

As we expect margins on lending to rise considerably we have factored that in, along with moderate base rate increases. What we have done here is to take a view that prices may have fallen 40% from the peak to now, but they will fall a further 10% p.a. for the next two years, a further 20% from today or over 50% from the peak.

Purchase in 2010
€200,000 90% mortgage over 25yrs [€180,000] @ 4.5% [10yr fixed]
base rate 1% margin c.3.5%
repayment per month: €1,000
total cost: €300,000
balance after yr. 10: €130,785
Total Interest Paid by year 10: €70,845
Capital & Interest combined after 10yrs: €120,059

Purchase in 2011 (10% price drop)
€180,000 90% mortgage over 25yrs [€162,000] @ 6.5% [10yr fixed]
base rate 2% margin c.4.5%
repayment:€1,093
total cost:€328,150
balance after yr. 10: €125,568
Total Interest Paid by year 10: €94,828
Capital & Interest combined after 10yrs: €131,259

Purchase in 2012 ( 12% drop on 2011 or 20% price drop from 2010)
€160,000 90% mortgage over 25yrs [€144,000] @ 8% [10yr fixed]
base rate 3% margin c.5%
repayment:€1,111
total cost:€333,424
balance after yr. 10: €116,299
Total Interest Paid by year 10: €105,669
Capital & Interest combined after 10yrs: €133,369

What we can see is that the price of a property is one thing, but the cost of it is another, the price is dictated on the day of purchase (signing contracts really but in effect when you close), but the cost for non-cash buyers is dependent on the interest rates involved.

We can see that if margins (using the 10yr fixed rate) were to go from 350 basis points to 500 (which is only 1.5% more and totally reasonable within the 2-3yr time frame) while base rates moved somewhat conservatively as well that the reduced price doesn’t save that much in terms of monthly costings, in fact, the gain on the reduced capital sum is virtually the same as the additional cost, but (for me anyway) I’d rather have increased cash flow versus having a reduced capital sum - within reason of course!

Could this really happen? Take a look at the Euribor yield curve below, it is pricing in rate increases, but because this is market based and not from the ECB itself we can only use it as a guide, having said that, it is a guide based upon millions of transactions so perhaps it is as ‘real’ as it gets.

That banks will increase margins is a given, and people have a tendency to believe rates will stay low and they don’t look across the curve, if they did then lots of people would have been fixing their rates in 2004 but instead they went for fixed rates predominantly from 2005 onwards when rates were in an upward cycle and the upswing was already priced in! The reward for huge groups who made that decision was not only negative equity, but a higher financing cost in the process!

This doesn’t mean property is in some widespread recovery, but it is a reminder to people that ‘property prices’ are not the only consideration in buying, if you could book a rate today and get it in two years that might be ideal, but because that isn’t possible then don’t forget to consider costs as well as prices.