This article was originally published by the Irish Mortgage Holders Organisation.
Last week, details of AIB’s new split mortgage emerged. This new product is available to all customers who have their family home mortgage with AIB, EBS or Haven.
In a time of many different groups preaching aspirational solutions without precedent, evidence, track record or a guarantee of success, split mortgages – irrespective of one liking them – are a solution for people in mortgage difficulties.
Not all lenders offer a split mortgage product. The mechanics of any split mortgage will depend entirely on individual circumstances and affordability. This new split product addresses a number of negatives that exist with split mortgage products offered by lenders.
For example, Mary and Tom have a mortgage of €300,000. The property, on the basis of a valuation by a bank appointed valuer, is worth €200,000. In this circumstance and based on affordability of at least 80 per cent of the open market value, the new split loan may work as follows.
Tranche A would be €160,000 (80 per cent of open market value – minimum criteria required to qualify for a split). However, tranche A will always be based on what you can afford above 80 per cent of open market value.
This leaves €140,000 remaining. An immediate write off of €40,000 occurs. Tranche B would then be €100,000 interest free.
If, after five years, all monthly payments are made relating to tranche A, five per cent of tranche B will be written off, reducing it from €100,000 to €95,000.
If, after ten years, all monthly payments are made relating to tranche A, a further 5 per cent will be written off tranche B which will reduce this sum from €95,000 to €90,250. Furthermore, if a lump sum is received during the first ten years and is applied by Mary and Tom to tranche B at their discretion, a further write off may occur.
There is an incentive outlined below to make it attractive to use any lump sum to get a further write-off, but this is Mary and Tom’s choice. Unlike with existing split mortgage products, the new insolvency arrangements and bankruptcy, there is no review of your personal financial circumstances, and you are not required to move any of tranche B into tranche A.
This is a fairer, more secure aspect of this new split. In addition, there is no requirement to surrender your tracker or pay any fees to arrange this split mortgage.
The old split mortgage product, and split mortgages by other lenders, require any improvement in one’s financial circumstances to be applied towards reducing tranche B by moving an amount of tranche B into tranche A, thus increasing monthly repayments. This does not happen with this new split mortgage product.
However, if Mary and Tom get a pension lump sum at retirement, they must put this towards paying down tranche B. This only applies to pension lump sums, and doesn’t apply to any other lump sums a person may receive, such as an inheritance, bonus payments, gifts or a lottery win. On this matter, it is always advisable to seek professional pension advice.
Any lump sum greater than €1,000 paid in years 0 to 5 will attract an additional 30 per cent writedown above the amount paid. Multiple lump sums can be paid at different intervals. And any lump sum greater than €1,000 paid in years 5 to 10 will attract an additional 20 per cent writedown above the amount paid. If a lump sum is received after 10 years no additional write off is given.
On repayment of tranche A, tenure in the property is guaranteed irrespective of the amount of tranche B remaining.
However, based on bank lending criteria at that time, if there is an ability to make payments in respect of tranche B, affordable repayments against tranche B will be agreed. If there is no affordability to make payments, nothing will be paid, and tranche B will eventually be paid from your estate.
As mentioned, no interest accrues on tranche B. This, again, is a significant improvement on existing split mortgage products and allows certainty of payments and certainty around the future.
Any increase in pay is kept by Mary and Tom to spend as they wish. This will allow them to get on with life and enjoy any improvement in their earning capacity through pay increase, promotion, bonus, additional job, businesses developments, without the bank watching over their shoulder. This is obviously good for Mary and Tom – and good for the economy, too.
Any client of the Irish Mortgage Holders Organisation for whom we have previously negotiated a split mortgage with AIB, EBS or Haven will be offered this new product.
I, like everyone else, would like a blanket writedown on family home mortgage debt. Irrespective of one’s view on the split mortgage, to hold out for a magic write-off will disadvantage the borrower as the rules around engaging with lenders have changed, requiring banks to not just threaten repossession, but to actually repossess.
*David Hall is director of the Irish Mortgage Holders Organisation*