Many landlords may be worried following recent reports that banks (EBS, AIB & Bank of Ireland), may attempt to collect rental income directly from tenants for those properties where the landlord is in arrears on mortgage repayments. A report in today’s Irish Times points out that there may be some legal difficulty in this regard. Also, the banks appear to be to be keen to stress that this will not apply to small investors. It seems that the bank is targeting those landlords, some who have moved abroad, who use their rental income for other purposes and have allowed arrears to build on their buy-to-let mortgages.
At SCK Group we have been helping landlords maximise their rental income through Rent-Monitoring and where properties are difficult to let because they are in bad repair, through our Property Refurbishment Scheme. We also negotiate with lenders on behalf of landlords.
Further to Mr Patrick Honohan’s comments that the “banks will have to be more aggressive in repossessing properties in the buy-to-let sector” a couple of points should be noted. Firstly, as a company working closely with buy-to-let investors, we are unaware that the banks were ‘holding off’ on being aggressive with landlords. In our experience working with our clients, we have found that the banks have already been taking an aggressive approach with borrowers, and it has taken considerable effort on our part to get the banks to agree to any arrangement with the borrower. In addition, many landlords have cross-secured their buy-to-let investment with their home, so if the bank seek repossession, this will place the landlords home at risk.
Since the downturn landlords have seen their rental income drop, increases in variable mortgage interest, the introduction of NPPR, USC on rental income, the reduction of mortgage interest that is tax allowable to 75% and the recent introduction of the household charge. Take a landlord who has rental income of €12,000 pa . If is mortgage is on a variable rate, his interest repayments will typically also be €12,000 pa, of which he can only allow €9000 against his rental income, so he will be liable for tax, USC etc on €3000. He will also pay €300 in property taxes and will have other bills for service charges, maintenance costs etc. Unless the landlord has losses forward from previous years or unused capital allowances, he will be paying income tax on a negative income.
If the banks insist on repossessing buy-to-let properties, they will either sell them at a vastly reduced price, leaving the landlord with the remaining debt leveraged against his home, or the bank will attempt to manage the properties themselves. Managing buy-to-let properties is not the banks area of expertise. The bank would be better coming to an arrangement with the landlord with regards to his loan repayments and allow the landlord to manage his property himself, or with the help of a property management company, who have experience in the area and can maximise rental income and therefore enable the loan to be paid off over time.
At SCK Group, we have been working with our clients to help them navigate what has been a difficult time for landlords. We have been negotiating with the banks on their behalf and have had some success in this. Many landlords have not been utilising all the capital allowances available to them and we have been able to reduce their tax bill by advising them in this area. Some properties have fallen into disrepair because landlords have not had the money to pay for ongoing maintenance. When we realised that this was preventing landlords getting tenants for their properties, we set up our Property Refurbishment Scheme, whereby we will carry out the repairs, pay the up-front costs and then the landlord can repay us overtime from the rental income. This year, because we recognise the extra burden placed on landlords, we are going to pay the NPPR (second home tax), for all new properties let and managed by us.
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.
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
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.
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.
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.
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.
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.
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.
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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Mortgage arrears are often part of a bigger debt picture that could involve credit card bills, car finance and credit union loans. The question is often which do you pay first? A lot of people think that it is perhaps okay not to pay their mortgage because they think the bank themselves are offering grace because of the exceptional economic circumstances. Often, people pay their credit card bills before they pay their mortgage because credit cards can be seen as a form of income.
After reading a recent Aviva mailshot I noticed a statistic indicating that annual savings out of disposable income in 2010 will be €10 billion higher than they were in 2008.
People have cottoned on to the idea of saving. My view is for people with borrowings to realise the optimum way for them to save is by accelerating the repayments on their debts, be they mortgages, credit cards or personal loans. By doing this they are effectively getting a return of the interest rate being charged on the debt, which is much higher than sticking the funds on deposit and having to pay DIRT into the bargain.
An interesting Article from Irish Independent, by Charlie Weston, headed Cannibals Rule makes for an interesting read on the subject.
Also, PTSB article in RTÉ Business News confirms savings is the new mortgage, but now the financial institution owes you the money, as opposed to you owing them the money!!!
For more information on Mortgages and Savings Advice contact Pat Nestor firstname.lastname@example.org or 01-2910800.