Split mortgages with accruing interest are really no different to interest only extension periods and should be banned, according to the Association of Expert Mortgage Advisors (AEMA).
It wants them outlawed because, the AEMA say, there is a distinct possibility that they are misleading the homeowner into believing that they have secured a long-term viable solution to their financial troubles – when in fact they are simply racking up further debt for another day.
“We welcome the recent comments from Professor Honohan in relation to unsustainable debt and particularly his comment that the time for passivity has passed, and while we believe in the concept of split mortgages, some of the versions being presented to homeowners are far from equitable. There are particular split mortgage terms being offered that, rather than relieve struggling mortgage holders from their financial predicament, could actually make their long-term position worse. We have reviewed the market&this is our view: there are good split mortgages, reasonable split mortgages and really bad split mortgages,” said DJ O’Donovan of the AEMA.
“The key components of any split mortgage must include a genuine incentive to repay and a clear long-term capacity to repay – so the forecasted payments must be realistic and not dependent on the homeowner doubling their income over the next ten years or winning the lottery.”
“Of late we have been disturbed to see some lenders seeking to charge interest on the “parked” piece of the debt and others looking to tie in unsecured debt to the homeloan, converting this to secured debt as part of the deal. We’ve even seen lenders looking to access the homeowner’s future pension benefits on already unsustainable homeloan. We believe that this is unacceptable, unreasonable and is an abuse of the central intention when Split mortgages were first contemplate,” said Mr O’Donovan.
The mortgage experts contend that where the only option to the mortgage holder is what they term a “really bad” split mortgage offering, in such circumstances, alternative solutions including bankruptcy via the new insolvency legislation, whilst not preferred, may prove more beneficial to the borrower in the long-run – particularly if they ever hope to own their own home.
“The Keane Report suggested a percentage of net income (40pc) be considered when assessing capacity to repay a Split Mortgage much like lenders current lending policies on assessing new Homeloans applications, but we’ve seen instances of lenders looking for over 50pc or more of the homeowner’s income. That is simply not sustainable as it takes no account of future personal requirements and financial shocks and inevitable increases interest rates,” Mr O’Donovan added.
AEMA are advising homeowners who don’t believe that they will be able to afford the repayment at all stages of the split mortgage to reject it and deal with the problem now rather than deferring it for a further 10 years, when they’ve less time to recover financially before retiring.