I have a tracker mortgage loan of € 100,000 and a variable mortgage loan of € 80,000. They recently left me € 150,000 in my father’s will. I want to use these funds to reduce my mortgage.
What is the best way to do this? Could I negotiate to exchange the tracking plan with a variable interest rate to reduce the amount of tracking loan due and then repay both loans in full?
Mr GA, email
There is a bit of ambition here, but I think you are overestimating the bank’s willingness to consider such deals. At least you have the good fortune to make choices through your inheritance from your father.
You have a mortgage of € 180,000 on your property, most of which belongs to your tracker. This would not be an uncommon feature of the Irish real estate market and would be quite common among those who had mortgages on their homes and then traded on the days of the Celtic Tiger’s death or since.
Banks no longer offered trackers, but buyers often had the option of moving their mortgage to their new home – even though the margin above the ECB interest rate sometimes increased in the process. The balance will be covered by a separate mortgage with a fixed or variable interest rate.
Now, with this legacy, you have decided that you want the piece of mind to be almost without a mortgage in your home.
The obvious first move is to pay off the most expensive loan first. This is inevitably the floating rate loan and this is what you need to deal with first. But you have a more ambitious approach.
Do you want to contact the bank, with an offer to change the monitoring loan to a floating rate loan, as long as they reduce the balance by € 30,000. Then you want to show up a day or so later to pay off your remaining mortgage in full with the amount you received in your inheritance.
It’s a sly plan, but I can not see it working.
First, banks are slow to write off debt. Unless they are afraid that the alternative is that you will simply not be able to repay the loan at all and that they will be ready for more than that € 30,000, there is no reason to even think about it.
And, as I understand it, there will be nothing in your personal or professional finances that suggests that you are anywhere near this position. This is not something you want to do because you have no other financial means. On the contrary, you just want to benefit as much as possible from the increased financial hardship that this legacy will give you.
From the bank, on a purely basic basis, given the difference between the tracking rates and the best current variable interest rates offered – around 1.5 percentage points – the bank is unlikely to cover the € 30,000 discount even if the mortgage your loan was over 20 years left to run. And they will fold the numbers.
Second, the faintest lender will hear the alarm bell ring if a customer approaches with an offer to voluntarily turn to a more expensive loan for no apparent reason. And lending staff tend to be quite intelligent. You should be able to explain to them why such a move makes sense from your point of view.
And, of course, it does not.
Irish banks are currently paying a heavy price, financially and in terms of reputation damage, for their behavior during the mortgage crisis, when they effectively refused access to surveillance loans they were entitled to or were charged more interest than, what should.
In this climate, the idea of a bank concluding a deal that it knows is to the detriment of the customer with the prospect of a subsequent regulatory review is fantastic.
The only reason to do this is to reduce the loan enough to allow you to repay it briefly with your existing financial resources. The bank will suspect this to be the case – as it is the only logical interpretation.
And he will certainly not be willing to give a 30,000 euro discount in anticipation of a higher loan interest payment during the scheduled loan term, if he suspects that he may have zero benefit from such an arrangement, because you intend to pay the full amount immediately.
Nothing prevents you from approaching the bank with such a proposal, of course. I highly doubt they would consider it, given the regulatory concerns. Even if they did, any discount they would give you would be, I suspect, nominal.
Thus, it leaves you with the smallest option to repay the most expensive variable loan in full and use the balance to deduct € 70,000 from the existing monitoring loan.
For what it’s worth it, if you’re really determined to pay off your mortgage, the best way to do it as quickly as possible is to continue making monthly payments at your current interest rate. With just € 30,000 left on the loan, this will speed up the point at which you are mortgage free.
The alternative is to reduce your monthly mortgage payments so that the loan can be extended for the full scheduled period of 20 or 30 years, while leaving you with significantly more disposable income on a monthly basis.
I would strongly advise you not to take this second approach unless you are currently under severe financial stress. It will mean that you will pay much more in interest on the loan than you need and it will clearly mean that the mortgage will hang around your debit line for a much longer period of time. It seems to contradict your stated intention to get rid of this loan as soon as possible.
In both cases, you will have to check the default position of the bank regarding the continuation of the repayment of this mortgage after repaying the € 150,000. I will not be surprised if the default was just to reduce the payments and continue the full duration, so you will need to intervene and inform the bank that you want to continue making monthly payments at the interest rate you are currently making.
Do this in writing. As regular readers of this column will know, my strong advice is that you should always confirm in writing any interaction with your bank.
Oh, and before you do anything with a mortgage, make sure you increase your financial resources to pay off any other expensive debt – such as credit cards, overdrafts or personal loans.
Send your Inquiries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street, Dublin 2, or email to [email protected] This column is a reading service and is not intended to replace professional advice