It seems that seven banks have been cleared to offer them as a solution for borrowers who are in difficulty, but what is a split mortgage and how will it work?
This week we break down one of the ideas, you can also vote on what you think the best solution would be…
Split mortgages are one of the ideas mentioned by the 2nd expert group on mortgage arrears which was an interdepartmental operation. According to the recommendations on page 27 of the Keane Report it is as follows:
- The mortgage is split into a sustainable portion and a warehoused balance.
- If the borrowers circumstances improved then some of the debt would come out of the warehouse and onto the balance (talk about an incentive to stay poor- any prosperity already has a future claim on it!)
- The balance (warehoused part) at the end of the term would be paid off in one of several ways, by selling the property and clearing the remaining loan, trading down to a smaller property, realising other assets such as pensions or lump sums/inheritence etc. or by agreeing a life interest in the property (which I suspect is a reversionary loan where you stay put and the lenders portion of the loan compounds interest which eventually negates the borrowers stake).
Here is a table showing how earning more will bring debt out of the warehouse and into your house:
You’ll note that the original loan balance is not mentioned, rather they base your repayments on what you can repay, this becomes the ‘live mortgage’ the rest goes into the magical warehouse. You can see that from 2012 to 2017 some money is paid down (€10,000), no sooner does that happen than €28,000 comes out of the magic warehouse and goes on top, so you struggle to pay in order to get deeper in debt – I’m told there is some genius workings in here but am struggling to find them so far. The next example will break it down further.
The owner of a split mortgage will also have to pay a higher percentage of their net disposable income or NDI towards the loan than the banks would normally underwrite – in other words – the banks agree that you can pay 40% of your disposable income towards a loan if you already owe them it, but damned if they would lend to you on that basis.
Now onto a working example, in the report they have a ‘happily ever after’ scenario, and then the more realistic one, I’ll deal with the latter, bear with me, this is some boring $h1t but it’s important.
So Mr. or Mrs. Borrower is €80,000 underwater, and assuming there is 2% growth in prices every year then in 30 years they can hope to have a place worth €217,000. Their existing 200k loan is broken down into two parts, as mentioned the €123k affordable part then €77 is hived off to the magic warehouse.
As before, in year 1-5 your loan decreases by €10,000 but don’t forget the happy warehouse is there compounding against you all the while, while you pay off 10k it manages to make you worse off by €21,000! Now you have gone from owing €200,000 to €211,000 in return for sacrificing a higher percentage of your disposable income. You earn a little more in year 5 and presto, you are gonna pay out more!
The €70,000 is now back in the warehouse (and remember: you always want compounding working with you not against you!) and it turns into €226,000 by year 30.
At which point you can happily sell your house because you don’t own it and even avail of a €9,000 loss for the pleasure of it. Perhaps I am reading too much into Islamic finance of late and identifying with their founding premise of ‘risk sharing’, but where is the pain in this for the bank? Granted, they have some assets that they can’t realise and must provision against, but it isn’t really the same as ‘losing’ the way the borrower does.
This idea is stupid, plain and simple, it is stacked in favour of the lenders, that is why 7 of them have already signed up to it; a classic ‘delay and pray’ manoeuvre and the only way it would make any sense to use would be if interest were discounted or waived on the warehoused portion, otherwise it makes better sense to just go bang and have a personal insolvency agreement under the new legislation.
Why go bang instead? Well, you get to start again with no claim on future income the way this one does which could create potential losses 30 years away, if you have a home you simply can’t bear to leave then that might sway it, but for your average borrower in trouble this is a ‘solution’ but only for one side of the debt party.