Blog Archive - January 2011

This article was in the Irish Times Property Supplement on 27th Jan and explains why things have become so difficult for landlords recently. Just 1 small point; PRTB is now €90 not €70 as stated in the article.

Far from being members of a fat-cat elite, many small-time property investors say they face bankruptcy if Section 23 tax reliefs are phased out, writes CAROLINE MADDEN

MENTION the phrase “Ireland’s landlord classes” and it conjures up images of a rackrenting, bed-sit- peddling elite who simply sit back and watch the money roll in from their vast property empires. In reality, today’s landlord is much more likely to be a small-time, buy-to-let investor, with one or two white elephant properties, who is now facing death by a thousand cuts.
Last Thursday night, about 250 such property investors gathered on Dublin’s northside for a meeting of the Irish Property Owners Association (IPOA), where they expressed fears of financial devastation. Many warned they would face bankruptcy if the curtailment of Section 23 tax relief announced in Budget 2011 went ahead.

The following afternoon, IPOA members and thousands of other investors breathed a sigh of relief as the Finance Bill put the Section 23 proposals on ice until at least 2012. However although they have been granted a reprieve, it is only temporary.

In last December’s Budget, Minister for Finance Brian Lenihan announced that property-based legacy reliefs were to be phased out. The most controversial element of this related to Section 23 tax relief on rented residential property in tax-designated areas.

The main attraction of this type of property for investors was the ability to offset between 75 and 90 per cent (typically) of the purchase price against all of their Irish rental income, thereby cutting their tax bill.

However Minister Lenihan announced that from January 1st 2011, the relief could only be offset against rental income from the Section 23 property, as opposed to rental income from all of the investor’s Irish properties.

As the rents on Section 23 properties tend to be low, and borrowings are almost always high, little or no taxable income arises on such properties. Therefore if the tax relief were to be ring-fenced in this way, it would become worthless for many investors.

Doubtless the Government banked on the public appetite for meting out punishment to anyone associated with property development to carry this proposal through. However the big property players would have escaped unscathed from any such restriction, as they were generally able to use up their all of their reliefs or allowances in the first year or so.

Instead, small individual investors – from middle-class full-time landlords to tradespeople to pensioners – would have found their unused Section 23 relief effectively guillotined this year.

Representative groups argued that to retrospectively change the terms of the incentive was unfair, as investors had a legitimate expectation of being able to claim the full relief as offered to them by the State at the time of investing.

The Government was inundated with several hundred submissions to this effect and announced it was delaying the change, ostensibly to allow for the completion of an economic impact assessment.

In reality, as Labour finance spokeswoman Joan Burton summed it up last week, what the Government has done is to simply kick the can down the road.

It will take at least six months for the assessment to be completed, by which point it will be someone else’s problem as a new government will be in place.

If the Labour Party gets into power it is unlikely to take a softer line with property investors than the current Government, but it is impossible to predict whether the Section 23 proposals will eventually be implemented, changed or scrapped.

A recently-formed group, Justice for Investors, is encouraging investors to continue lobbying TDs and the Minister for Finance on this issue because of the uncertainty surrounding it. It has provided sample letters and TD lists on its website, justiceforinvestors.com.

Paul Reynolds, president of the Institute of Professional Auctioneers and Valuers (IPAV), has highlighted the fact that the deferral of any decision on property incentives has created serious uncertainty in the market. Investors now find themselves caught in a limbo – whatever hope they had of selling a Section 23-type property before, they have even less chance now.

This tax-shelter saga is not the only thorn in the side of property investors. In the 2009 emergency Budget, the amount of mortgage interest that could be offset as an expense against rental income was reduced to 75 per cent (from 100 per cent).

According to a Munster-based landlord (who did not wish to be identified) with more than 20 properties and no other source of income, this is a more serious issue for investors than the proposed restriction of Section 23 reliefs as it affects everyone who owns a second property and rents it out. “It’s not purely rack-renting fat landlords,” he says. Many investors are just waking up to the impact of this change now, as they only became aware of it when they filed their tax return three months ago.

“It’s a bigger but less immediate problem. People are going to slowly go bust,” says the landlord.

“With the 75 per cent mortgage interest restriction, there is no case for investing in residential property in Ireland,” he says. “You can only lose money.” He makes the point that if, for example, an individual earns €1,000 a year in rent, and they pay €1,000 in mortgage interest, (ignoring other expenses) they are breaking even. However they can only deduct €750 for tax purposes, and therefore will be taxed on €250, even though in reality they did not make a profit.

“It’s one thing to pay tax on income you have. It’s quite another to pay tax on income you don’t have,” he says. He believes that if the 75 per cent interest restriction is not repealed, he’ll be “wiped out” and the property market will not recover. “Investors are never coming back into the market while some of the interest costs are disallowed,” he predicts.

Like many investors, he is only repaying interest on his property borrowings at the moment. “I can only repay capital if I’m making a profit, so I’m interest-only.” He says he has been “invited” by his bank to begin repaying capital, but he has not been “compelled” to do so.

“If I was, it would be become a distressed loan, so the banks can’t afford to go there,” he says. Different banks have different approaches, though, and many investors have been contacted by their lenders in recent months to inform them that they are due to begin repaying capital on their borrowings.

In some cases, investors on tracker mortgages have been presented with two options: begin repaying capital as well as interest, or switch to a more expensive variable rate mortgage and remain interest-only for a further period of, say, two years.

The problem is that many landlords are struggling to meet their interest repayments, let alone repay the principal of the loan. Not only have rents shrunk, but the list of expenses landlords face has grown considerably longer. Firstly, there’s the annual non-principal private residence (NPPR) charge of €200, which cannot be written off for tax purposes.

If the investor’s property is divided up into different flats, bedsits or apartments, this charge applies to each of the units.

Management fees are another area of growing concern for owners of apartments, including buy-to-let investors, as they can run into thousands each year. Landlords also have to register every tenancy with the PRTB now, at a cost of €70.

And as of January 1st, 2009, all homes for sale or rent have been required to have a BER certificate, which indicates how energy efficient the property is. There is no set fee for getting a BER assessment carried out, as it depends on the type of property, but it usually costs between €120 and €300.

“A lot of people are in a situation where they would be better off to have nothing [no property],” a spokeswoman for the IPOA said. “They’d be better off on social welfare instead of working and paying money towards their investment properties. They’re in a situation where they have pared down their own expenses to the bare bone.”

With the most vulnerable sections of society being hit by budget cuts, and family homes being repossessed, there is little sympathy for those who saddled themselves with debt to join the landlord classes.

But with no property market recovery in sight, many investors will soon be forced to choose between paying their taxes and repaying their borrowings, at which point their problems will become the State’s problems too.

Multi-unit bill will prevent rip-offs

PAUL CULLEN

NEW legislation which came into force this week may help prevent apartment-owners being ripped off by management companies. The Multi-Unit Development Act, which was signed into law by the President, Mary McAleese, on Monday, addresses major weaknesses in current legal protections for people who buy units in apartment blocks.

A key provision is that ownership of common areas in apartment blocks or housing estates is transferred from the developer to the management company, controlled by owners, before any unit is sold.

Transfer of ownership must occur in a timely fashion for developments already completed or partially completed. This addresses a situation where developers have held on to a small number of units to retain control of the development company. It has led in some cases to management fees running into thousands of euro being levied on apartment owners.

Another requirement will be an annual minimum contribution of €200 per unit for a sinking fund to meet any large, unexpected or non-regular costs. One unit, one vote, will apply on management companies and owners will have to pay charges, whether they are a developer or not and whether the unit is occupied or not.

The Act is one of the last that the current Dáil will pass before it is dissolved. However, the related Property Services (Regulation) Bill, which provided for the setting up of a national house price register, didn’t make it through all stages in the Oireachtas. As a result, housebuyers and sellers will remain in the dark about prices, at least until a new Government tackles the issue.

Costs, benefits for landlords

ASSETS/INCOME

The dream of capital appreciation has been replaced by the nightmare of negative equity. Most investors who bought between 2004 and 2008 now find their borrowings exceed the value of their properties, in some cases by several hundred thousand euro.

Although rents are showing signs of stabilising, they have fallen to levels last seen at the turn of the millennium.

OUTGOINGS

Mortgage repayments : interest rates are set to rise; many investors are coming to the end of their interest-only term; and only 75 per cent of mortgage interest is now allowed as a deduction for tax purposes.

Annual Non-Principal Private Residence (NPPR) charge : €200 per unit

Cost of registering each tenancy with the PRTB : €70

BER assessment : €120-€300

Changes in the Finance Bill are designed to help small business. John Heffernan (Sunday Business Post) wrote the following article

The existing Business Expansion Scheme (BES) is being reformed and renamed the Employment *Investment Incentive (EII).

The new incentive is planned to replace the BES scheme and the Seed Capital Scheme. It is subject to European Commission approval and a commencement order from the minister for finance.

The current BES scheme and Seed Capital Scheme will remain in place until a commencement order gives effect to the new incentive.

The EII could be considered as significantly more attractive than the BES scheme that it is replacing. Some of the key features of the new scheme are as follows:

*The scheme is available to the majority of small and medium sized trading companies and is not limited to the type of qualifying trades that applied under the BES.

*The certification requirements have been simplified.

*It would be easier for companies carrying on green energy activities to qualify.

*The lifetime company investment limit has been increased from €2 million to €10 million.

* The annual amount that can be raised by companies has been increased from €1.5 million to €2.5 million.

* The period for which shares need to be held has been reduced from five years to three years.

These changes will make the new incentive more attractive as it will apply to a wider range of companies, it will allow companies raise a larger amount of funds and it will encourage individuals to invest more money in these companies.

However, there is a downside. The maximum rate of tax relief for subscriptions for eligible shares has been reduced from41 per cent to 30pe r cent, in recognition of the reduced holding period.

However, a further 11 per cent of tax relief may be available at the end of the holding period, provided the company concerned has increased its number of employees since the investment was made, or the company has increased its expenditure on research and development.

The only significant change to the Seed Capital Scheme is that it too will been simplified by removing the limitation on qualifying trades.

Finance Bill

The Finance Bill, just published has many changes that may affect you. Kevin McLoughlin writing in the Sunday Business Post, brings you through some of them.
Complex Finance Bill contains crucial far-reaching measures
23 January 2011

Despite the expectation of a brief Finance Bill to give effect to the essential revenue raising measures announced in the budget, some 223 pages of complex technical legislation were published last Friday.

Normally, the committee and report stages would add a further 50 per cent in paperwork terms.

While the government is driven by a political imperative to pass the bill before the upcoming general election, it is unacceptable that such complex, far-reaching legislation will not be given sufficient time to allow for proper consultation and meaningful debate. As a comparison, Britain will often publish legislative proposals a year in advance.

Interaction with Revenue

The Revenue’s ability to recover unpaid taxes from individuals still in employment will be strengthened by the bill, which allows it to issue a notice of attachment to the individual’s employer.

This will require that the employer deduct from the employee’s salary amounts specified by the Revenue. The bill also proposes a new provision to deal with the confidentiality of taxpayer information.

This provides for penalties of up to €10,000 to be imposed on Revenue officials guilty of unlawful disclosure of information. It also sets out the circumstances under which the Revenue may legitimately provide information to third parties.

Self assessment

The bill contains a surprise for the self-employed and other non-PAYE taxpayers who pay tax under the self assessment system.

The date for payment of preliminary income tax has been brought forward by a month, from October 31 to September 30.

The due date for payment of the balance of tax, and for the filing of returns, has also been brought forward to September 30.This will be effective for the 2011 tax year onwards.

Therefore, preliminary tax for 2011 will be payable on September 30this year and the due date for filing a 2011 tax return will be September 30,2012.

Taxpayers using the Revenue online Service (ROS) will continue to benefit from a 14day extension period for filing and payment. The payment dates for capital gains tax will remain unchanged.

These changes, primarily intended to accelerate the receipt of income tax payments by the exchequer, will introduce further complexity into a system which many taxpayers already find difficult to comprehend.

In the first year of operation (2011), a taxpayer with income tax and capital gains liabilities could have as many as five different dates for filing returns, meeting their tax liabilities and paying pension contributions.

None of this is likely to enhance the smooth operation of the self assessment system, which has been tinkered with to such an extent in recent years that it now bears little resemblance to the ‘pay and file’ system initially intended.

Although the period allowed for filing and payment is relatively long compared to similar systems in other jurisdictions, the Irish system’s complexity – its multiple deadlines and inconsistencies between return filing and payment dates for different taxes – makes it difficult for many to understand.

The proposed changes will do little to improve the position.

Personal health insurance

The Health Insurance (Miscellaneous Provisions) Act 2009 provided for an age-related tax credit in respect of private health insurance premiums paid to authorised insurers between January 1, 2009 and December 31, 2011.

This applied to those aged 50 years or over on the date the contract was entered into. Age-related tax credit may be given for the years of assessment 2009, 2010 and 2011 only.

However, in the case of private health insurance premiums payable under contracts of insurance renewed or entered into this year, where the premium is payable in instalments and some of those instalments are payable in 2012, age-related tax credit may be given in the year of assessment 2012.

The age-related tax credit is given at source by authorised insurers.

The bill contains an amendment to the age-related tax credit. It abolishes the credit for individuals aged 50t o 59 and increases the amount of the credit for those aged 60 years and over for relevant contracts renewed or entered into on or after January 1, 2011.

For those aged between 60 and 69, the tax credit has increased from €525 to €625. For those in their 70s, it has increased from €975 to €1,275, while those aged over 80w ill see their tax credit rise from €1,250t o €1,725.

The authorised insurer will grant the age-related tax credit and the income tax relief at the standard rate of tax at source, meaning a lower net premium payable by the individual. Perhaps the intent of the increased credit is to lessen the impact of much publicised increases in medical insurance premiums.

Property

There was a very strong backlash to December’s budget proposal that the facility to offset property capital allowances against rental income from properties other than the specific tax-based property would come to an end in 2011.

Friday’s Finance Bill has kicked this issue to touch and it will now be a matter for the next government to decide how to proceed.

The bill sets out the changes in the tax acts required to bring these proposals into effect, but the Minister for Finance has deferred the implementation of the changes until the completion of an impact assessment.

The bill makes it clear that the changes cannot come into effect before 2012 and can only do so once the minister signs a commencement order.

There remains great uncertainty regarding what will happen in 20 12.

At least the opportunity is now available, through the proposed impact assessment, to demonstrate the type of financial carnage that could be created through the implementation of the restriction.

Should the minister, whoever it may be at the time, decide to proceed with the implementation of the restrictions in the manner proposed by the Finance Bill then, for passive investors, any capital allowances in respect of investment in a building or structure can only be offset against the rent arising from that particular building or structure and will not therefore be available to shelter rental income from other properties.

These restrictions apply both to property based capital allowance investment schemes and to residential property investments, often referred to as ‘‘Section 23 relief’’.

As well as the blanket restriction on the offset of excess capital allowances by passive investors against other rental income, the Finance Bill contains provisions to limit the extent to which unused capital allowances from these investments can be carried forward.

These changes, too, will only be implemented once the impact assessment has been comp l e t e d, and c an not b e implemented prior to 2012. Individuals and companies entitled to property capital allowances arising from an active trade will continue to have full access to these capital allowances.

It is proposed in the Finance Bill, (just published but not yet passed), that the deadline for self-employed will be moved a month earlier from 31Oct to 30Sep, each year. Remember, get your return in to us early, as soon as possible after 1st Jan each year! SCK Group 01-2910800 www.sckgroup.ie

Because we have less money in our pocket, since the recent budget changes, it is more important than ever to make sure you are claiming all you are entitled too. We can help you with this at SCK Group 01-2910800.

Some of the ways you can reduce your tax bill include,
Medical expenses, Mortgage/Rent Relief, Service Charges, Tuition Fees, Trade Union Subscriptions. Contact us if you need further advice.

John Lowe – The Money Doctor gives you some advice in managing your finances in this weeks Sunday Business Post
The easy way to fix your finances
23 January 2011 By John Lowe

Debt management is not just a simple matter of setting aside a certain sum each month to meet the mortgage, loan and other fixed repayments. It requires planning, prudence and a degree of discipline which many of us may have lost sight of during the boom years.

What is debt?

Debt comes in many shapes and forms, but can be divided into three simple categories.

1. Long-term debt: this mainly consists of mortgages, but can also include any other debt that you have held for longer than seven years.

2. Short-term debt: borrowings Which would run for less than seven years and can include borrowings for car purchase, furniture, holidays, educational or other family purposes. Increasingly, this also includes conversion of hard-core overdrafts and credit card borrowings.

3. Running or current debt: typically, this would include bills which have to be settled every two or three months.

These include utilities such as electricity, gas, telephone/broadband, etc. Credit cards used for day-to-day expenditure would also be included here.

The crash of 2007/2008 has meant that most people who have been fortunate enough to hang on to their jobs have suffered sizeable reductions in real income, through a combination of pay cuts and income levies.

Add to this the interest rate increases for all but holders of tracker mortgages and the pressures on borrowers are all too obvious. Here are the key steps you need to take in tackling your debt.

Taking stock

Where are you now in your financial life and where do you intend to be at the end of this year? In five years? More importantly, where are you now in relation to 12 months ago and what steps have you taken to prevent any further drift ?

As I said, debt management is more than meeting your loan repayments as they arise. It should be an active rather than a passive exercise and should form part of a strategy of constant review. If you are in control of your finances now, it’s important to stay in control.

Where to start

1. Look at your family’s n et monthly income.

While you may Not be able to increase your gross earnings, it is important to ensure that you avail of all the tax allowances and credits et al.

For instance, have you claimed your medical expenses, dental costs, bin charges, your rent relief or pension relief for the last few years?

Social welfare and child benefit payments, additional jobs and any other forms of income should all be included in your net monthly income.

2. Now, consider your expenditure.

Many of us have no clear idea of our spending on such things as groceries, travel, entertainment or clothing. On the other hand, we know only too well how much we spend on utilities, heating, insurance, etc.

Keep a record of all your spending over a two or three week period – use a diary or a notepad – and involve your partner and family so that a full picture of family expenditure can be determined.

The initial shock of how much you spend on casual unwanted items will wear off. That bar of chocolate you munch every time you fill your car with petrol, the magazine you don’t have time to read – the list goes on.

3. Go through your bank statements over a three-month period, and have a look at al l standing orders and direct debits.

Are you still continuing to pay club subscriptions or making donations to charities which you no longer wish to continue? Consider each and every financial commitment: are they all necessary?

Remember the Money Doctor mantra: stop spending and, if you must, ensure best value.

Your expenditure can be broken into three categories, the ABC of expenditure:

A. Fixed outgoings: they consist of such things as mortgage/rent, loan repayments, electricity, gas, telephone costs, transport, educational, food and essential clothing, insurance, etc.

B. Discretionary spending: these cover all non-essentials such as entertainment, holidays, sporting and leisure activities.

C. Savings: these would include the provision of a rainy day fund – remember the ideal is to have three to six months annual income in an accessible account pension contributions, educational plans or other sums set aside to meet future expenditure for you, your partner and/or family.

By now, you should have mapped out your spending on a monthly or weekly basis.

You should then look at your fixed outgoings to see if there are cheaper alternatives. Electricity, gas, telephone/broadband and cable television are items that should immediately come to mind, but there could also be substantial savings to be achieved by shopping around for cheaper car and household insurance, and reviewing your life and health insurance.

Also, interest rates both for loan and savings products constantly change. What might have been the highest rate for your savings last year could very well be the lowest this year.

Now, have a look at your net monthly income and see how it matches up to your outgoings. All of these steps may achieve some savings, but essentially they merely consist of a tidying-up of your finances. This is something you should do every year, in good times or bad.

That is why you need to spend about two hours every month on your finances. By now, you will know your position and whether meeting your monthly commitments is causing, or is likely to cause you, problems.

Examine your Options

Mortgages

Your mortgage repayments are likely to be your biggest commitment but, in terms of interest rate, they are also the cheapest. If you are fortunate enough to have a tracker mortgage (tracked to the European Central Bank rate, now 1 per cent), do not be tempted to switch to any other product.

Trackers are like gold dust, and lenders are using all sorts of means to switch you from them.

Looking for an extension to your interest-only facility only gives them leverage to discuss that switch. Pay the full capital and interest repayment if needs must.

If, however, you are on a standard variable rate mortgage, some of these vary from lender to lender.

Check where your rate is compared to others on the market. If it is on the high side, you should first of all consider taking out a fixed rate with your existing lender.

Variable rates are set to continue to rise, even though the ECB rate will probably stay at its present level until late 2011. If you are not offered an attractive rate, you could shop around if you qualify.

You will be well placed to switch lenders if:

* your loan is less than 80 per cent of your home value

* you have sufficient earning to justify such a switch (as a rule of thumb about 4.5 times your annual income for both applicants)

* most lenders will approve a mortgage up to age 65, with a few up to age 70 and this has to be borne in mind if switching

* you have a good credit history, with no missed payments or judgments.

Personal loans

You may also have car loans, furniture or home improvement loans or overdrafts.

The ‘‘sniper approach’’ to getting out of debt should be adopted. This is where you ‘‘pick off’’ the most expensive debt first if you can. Some of these personal loans can attract interest rates over 16 per cent.

The greater the risk, the higher the interest rate.

Overdrafts

These are bank mechanisms for giving You money upfront – ie, a loan – on the promise of an eventual lodgment to the account to regularise the account, but charging you through the nose for it. They can also be misleading and lure you into a false sense of security.

Firstly, they are hugely expensive – personal overdraft interest rates start at around 13 per cent. Secondly the set-up charges, referral fees, unpaid fees, surcharges (an additional amount of interest – could be 1 per cent per month – chargeable if you exceed the overdraft limit without permission) are simply not worth it.

Managing without an overdraft is the ideal. Remember also the requirement for overdrafts is that they must be in credit for 30 days each year.

Credit cards

So you’ve ‘maxed out’ your credit card or cards, where you have used the full credit limits in your cards. What are your options? Paying 3 per cent of the balance each month will effectively create a 20-year loan for you based on the high credit card interest rates.

If your credit rating is good enough, however, and you are still in satisfactory employment, you could switch to one of the seven credit cards that offer 0 per cent on transferring your balance over to them for a period of time.

If you have an asset that you can dispose of in order to reduce your borrowings – such as a holiday home you rarely use, or even a second family car – be prepared to swallow your pride and take the hard decision. If you are sitting on any substantial level of savings, it would make sense to use some of them to payoff 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 is an option you can avail of, then you could consider consolidating all your non-mortgage borrowings either on the security of an asset, eg, 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.

Establishing priorities

The greatest priority for most of us must be to retain the family home. 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.

Be proactive

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 arrive. 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.

Taking early action can head off impending trouble, and will also impress upon the lender that you are determined to work your way through any problems.

Define your Endgame

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 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 dependants become self-financing?

Will your partner be able to enter the workforce if unable to do so at the moment?

Will you yourself be able to develop any sources of additional income? Reinvention is fast becoming a buzzword in business circles.

In other words, if you are preparing to approach any of your lenders/ creditors to negotiate with them, be sure 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.

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.

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 six months, one or two years

* a moratorium on all repayments – capital and interest – for a number of months

* a top-up mortgage/loan to allow you to consolidate all your other loans.

The first option of extending the loan term ould be attracctive if it alleviates the problem – ie, eases the cashflow and allows capital and interest payments to be continued.

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 the same. Interest-only for a period will obviously help, as in many cases it can effectively halve your monthly payments.

The saying that you can’t 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 forever, but there is little choice for the lender while the property market continues to weaken and sales are flat.

Some of the lenders will not give further interest-only extensions on home loans, but will approve payment reductions – this 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 – eg, due an inheritance – it 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 some breathing space. In the present climate, this is probably the least likely, as all lenders have liquidity problems and 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 interestonly 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 with a new enterprise, prudent bankers like to see entrepreneurs invest their own money into a 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.

1. Communicate: do not ignore creditors’ letters or calls. Burying your head in the sand will only prolong the agony.

2. 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 and create income. Jobseeker’s allowance or benefit should only be temporary.

3. Check your expenditure: do the analysis of your spending and 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.

4. Give hope: if you have lost your job or 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.

5. Pay something: even if your lender does not agree with your proposals, choosing to ignore demands or to pay nothing at all will only escalate repossession or worse, prison. If your interestonly 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 professional advice. I cite the example of golf professionals: they still use coaches.

As we near the end of January, people are getting their first pay packets and are seeing for the first time what the recent budget changes will mean for them. This article from Emma Kennedy, Sunday Business post, tells you to get creative with less cash!
By the end of this week, most of us will see the full extent of how Budget 2011 will affect us in black and white. December’s austerity budget announced €6 billion in spending cuts and tax measures, including a 4 per cent cut in social welfare payments, except pensions.

With the tax changes effective since January 1, people who are paid monthly will see just how much their wages have shrunk when they receive their January pay-packet this week.

Tax credits were reduced by about 10 per cent, taking the single person’s tax credit from€1,830 to €1,650.For a married couple, their personal tax credit is now €3,300, down from €3,660.

The tax rate bands have also been narrowed, meaning you now pay tax at 20 per cent on a smaller proportion of your income and consequently pay more tax at the marginal rate of 41 per cent. For a single person, the standard rate threshold was €36,400.Now it’s €32,800.

For a married couple with two incomes, the higher rate of tax now kicks in on income above €65,600. Previously, the threshold was €72,800.

The new universal social charge, which replaces the income levy and the health contribution, applies at 7 per cent on income of slightly over €16,000. Add to this the abolition of the PRSI ceiling, and most taxpayers will see a significant drop in their take-home pay.

With that in mind, and with the prospect of more harsh budgets ahead, it’s important to get your financial house in order to ensure each euro you earn goes as far as it can.

The financial habits we adopted in the boom days need to be changed, replaced with habits more suited to the current climate.

Make holding onto your cash, or at least as much of it as possible, your main objective for 2011. But before you can make changes to how you manage your money, you need to recognise your financial personality type.

The ditherer

Do you worry endlessly about your finances, but yet never get around to sorting them out? If you are worried about the financial position you are in, you must address the problems, as they won’t go away on their own.

Sticking your head in the sand and putting off important financial decisions only serves to give control of your finances to someone else.

For example, not engaging with your lender in relation to personal debt or mortgage arrears means that the ball is in their court. However, taking a proactive approach gives you more options.

Turn to p2 for The Money Doctor’s guide to getting your financial house in order and tackling your debts

The inert consumer

Do you grumble about your bank, your insurer or your mobile phone company, but continue to avail of their service? If you find that you are not getting value for money and good service, put your money where your mouth is and move.

Switching provider is easier than it seems, and there are statutory provisions in place to help you. For example, if you pay hefty transaction fees on your current account, look around at the other options.

Under the terms of the Central Bank’s code of conduct on current account switching, your bank is obliged to make the process easy for you.

If you suffer from consumer inertia, make 2011 the year that you actually shop around, rather than just intending to do it. Turn to p3 for tips on what to consider when switching provider for a variety of financial products

The impulse buyer

Do you take €50 out of the ATM and then scratch your head wondering where it went? If you are not in control of your spending, you need to become more disciplined if you want to meet your financial goals.

Taxis, takeaways, your morning coffee, a glossy magazine, expensive gizmos, underutilised gym memberships – the list of unnecessary spending goes on. If you can afford these items, great. But in most cases, these discretionary spending nasties can eat into already strained budgets.

Before you make a purchase, think about it. Keeptrack of what you spend, and realise that your spending has an opportunity cost.

Buying a coffee a day on your way to work, for example, means you are spending about €15 a week.

Don’t just let this money waltz out of your wallet. Instead, regain control of your finances by making an active consumer decision on whether you really need, or want, to make this purchase.

The saver

Are you saving and feel mildly smug that you are completely in control of your financial destiny?

Think again. Saving is about more than putting money aside each month. Firstly, are you getting the best interest rate on your savings, and are you aware of the rate your savings are earning?

Also, if you have debts, saving might not make sense. You need to compare the relative costs of each option. For example, leaving a few hundred euro in a demand deposit account at a miniscule interest rate makes no sense if you have an outstanding credit card balance that you are paying exorbitant interest on.

Saving is great, but make sure you save smarter to get the maximum benefit from your efforts.

Shop around for Health Cover

If you’ve been stung by VHI increases. Shop around for a better price. The following article is by Dick O’Brien (Sunday Business Post).
Consumers affected by the VHI’s hike in premiums last week should begin shopping around for better alternatives, a health insurance consultant has said.

Aonghus Loughlin, head of healthcare and risk consulting at Towers Watson, said VHI premiums had gone up by such a margin for many customers that better value was likely to be found by changing policies.

‘‘The first thing I’d say to people is that they have to take stock of what is important to them,” Loughlin said. ‘‘If they want to maintain cover in a particular hospital or type of hospital, they need to tell their current provider – and possibly the others – that these are the benefits they want to keep, and ask can they get them at a lower rate.”

Loughlin said that, in general, consumers were likely to be successful in getting what they wanted.

There are now 250 plan options available from the three health insurance providers: VHI, Quinn Healthcare and Aviva.

‘‘It is possible to switch – either with their existing provider or a new insurer – to a plan that will provide the same, if not somewhat better, coverage as they have now for a lower cost,” he said. ‘‘It will take a little bit of research but, once people take the time to decide what’s important to them, they can definitely make savings.”

Loughlin said many of the newer plans were more suitable to consumers than older options.

‘‘The vast majority have added what I would call a guaranteed outpatient element,” he said. ‘‘In the past, on Plan B, if you went to a GP, you paid the bill, and you got something back only when you hit a very high threshold.

These new plans have a €1 excess and guarantee that, on anything over that, clients will get something back. People who have young children or who are accident prone and end up going to the doctor a lot, should consider those plans.”

However, with speculation rife that other health insurers could follow the VHI’s lead and increase premiums, consumers are concerned that, even if they shift to an alternative provider, they could be again hit with price increases. Loughlin said that, while there was always the risk that another provider could also hike prices, they could only do so from the annual renewal date.

‘‘Anybody who renewed on January 1 with the VHI will not be affected by price rises until January next year,” he said. ‘‘You are guaranteed that, at the very minimum, prices won’t go up until renewal.

You can always make the decision to switch again at renewal date.”

Another alternative for those affected by the increase is to opt for a corporate plan.

While these plans are designed for businesses, every health insurance product has to be made available to all consumers.

Consumers could also seek to make their annual renewal early, before the new rises take effect, and thus get a number of months extra at the current price.

The VHI announced last Thursday that it was increasing premiums by between 15 and 45 per cent from February 1. The annual premium for the average family (two adults and two children) will increase by about €331, or €27.60 a month.

The 15 per cent increase will be levied on about 60 per cent of all VHI customers, namely holders of Plan A, Parents & Kids, LifeStage Choices and One plans.

Other VHI plans will be subject to larger increases. Plan B and Plan B Excess will increase by 35 per cent. Plan B Options will see the highest increase of 45 per cent.

Premiums for Plan C will be increased by 25 per cent, while Plans D and E will see a 21 per cent increase.

Health Sector Crisis

Do we need to do things differently?

The following article from Sunday Business Post

The current system of health insurance is breaking down. Slowly but surely, since the Supreme Court ruled out the old risk equalisation scheme in 2008, the cracks have widened.

The VHI’s decision to increase prices in away directly aimed at older customers is a clear signal of this.

The system of community rating – that you pay the same price no matter what your age – is under threat.

On a broader level, the crisis raises issues for the entire healthcare system. If fewer people pay for private insurance, then the already-creaking private system will come under further pressure.

Fine Gael and Labour agree that things should be done differently.

They favour a New system of universal health insurance as a key reform of the overall system, though they still have to spell out precisely how this would work and how it would be paid for.

Given the scale of the VHI increases, this will be a significant issue in the general election campaign to come.

Universal health insurance is no panacea. There are basic flaws in our healthcare system – in the way it is organised, in the division of responsibility between the HSE and the Department of Health and in the way money is allocated – which all need to be tackled.

If the new government wants to make real inroads, these will have to be taken on – as will drug costs and the hospital consultants, whose practices and charging structures in many cases still do not deliver value to either the taxpayer or the health insurance customer.

A properly structured health insurance regime can help, by changing incentives and structures, but the real basic work of reform is also essential.

Our healthcare system is funded via two sources – taxation and insurance payments.

The four-year plan agreed with the EU and IMF outlines an agreement for spending which will have to be adhered to.

This means better services can only be paid for in two ways – through higher premiums or through an increase in productivity in the healthcare system.

What a universal insurance system could do is improve the equity in our healthcare system by ending – or lessening – the current public-versus-private divide.

We believe that this would be best achieved by continuing to allow private healthcare insurers to compete with each other, even if this is within a structure where basic packages are available to all citizens.

Fine Gael and Labour need to spell out their plans – and how they will be funded – during the election campaign.

There is no point in introducing a new healthcare system which imposes higher costs on policyholders but does not lead to a better service.

A new health insurance regime can be an important part of the reform process, but promises to save money by cutting down on admin and making the system more efficient need to be clarified.

The following is from an article in the Sunday Business Post last week by Cliff Taylor.

Double standards on debt?

Is this the year when the different treatment of people with debts finally comes into focus? The first group are the big developers with massive debts who are mainly dealing with Nama. Some have moved offshore; some have transferred cash to their spouses; and, while some will doubtless be closed down by Nama, the agency will also work with others.

The second group might be called the non-Nama debtors – the banks seem to have shown some forebearance, but is AIB’s move on Ivan Yates a sign of things to come? And is it the case that the middle-ranking business person is going to end up getting a rougher deal than the developer who owes a couple of billion?

Finally, there are the punters with big mortgages.

The banks have been pushed into giving this group extra time to repay their debts but, so far, any question of write-down or forgiveness is off the agenda.

Yet, in the case of the big developers, nobody believes they will ever repay their debts – even if the charade that they are being pursued for those debts continues.

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Seamus C. Kane T/A Seamus C. Kane and Associates is regulated by the Central Bank of Ireland
Seamus C. Kane T/A SCK Financial Services is regulated by the Central Bank of Ireland