The Sunday Times - Money Comment 07/06/09

Posted by Jill Kerby on June 07 2009 @ 21:37

With Irish bankruptcy proceedings hopelessly complicated and expensive and no formal voluntary insolvency arrangement in place like they have in the UK, preventative measures have always been the way to proceed here in Ireland when someone gets mired in debt. 


From the end of September next, a new protocol between the banks and MABS, the state funded, money advice and budgeting service will be launched with two aims – the setting up of a partnership approach between creditors and MABS and then following a five step plan that will result in a mutually acceptable, affordable, sustainable, repayment plan that keeps everyone out of the courts. 


So far so good; however, it could come a little unstuck when some creditors, who must “ensure that their door is always open to customers who may find themselves in financial difficulty” find that no matter how willing in principal they are to help their debtors cope with this downturn, in reality if it comes to a ‘them or us’ conflict of interest, there might not be the satisfactory ending that this protocol seems to anticipate.


September seems a long way off for anyone currently struggling with serious debts or who hiding from their bank. You might want to get onto the protocol queue as soon as you can by speaking to a MABS advisor now.  A copy of the IBF/MABS Operational Protocol: Working Together to Manage Debt can be downloaded at www.ibf.ie




We should know next month what tax changes to personal pensions are recommended by the Commission on Taxation, but pension consultants are expecting the worst - that the tax-free lump sum, worth 25% of a pension fund in the case of the self-employed or director’s pensions and the equivalent of one and half times final salary for employees in occupational schemes, will end up being taxed, perhaps the 17.5% figure that was leaked by government sources around the time of the April mini-budget. 


For someone with a million euro pension fund, this tax raid means a potential loss of €43,750.  If such a recommendation is made, pension consultants expect a rush of interest by the self-employed and company directors who are over age 50 out of their Retirement Annuity Contracts and executive pensions into more flexible PRSAs. 


John Mulholland of Dublin pension consultants Custom House Capital says that redundant employees and executives are also “quite sensibly” opting for the PRSA solution, since it doesn’t stop them looking for, or working in a new job even after they collect their PRSA lump sum and pension. 




Early this year, at a personal finance seminar I was giving, a woman rounded on me for my apparent lack of sympathy for first time buyers who were now stuck with enormous mortgages and negative equity.  


She thought it was unfair of me not to jump on her bandwagon and demand that the government – “who are bailing out the bankers” - force these same bankers “to do something” to alleviate the financial and emotional stress her son was under in trying to meet the repayments on his “bachelor apartment”.  


Interest rates were still a couple percentage points higher then than they are now, so this mammy’s boy was probably paying at least 2%-3% more interest than he is now. But it was the fall in the market price of his house that she was also concerned about:  “It was the banks lending too much money that caused prices to rise, but now that they’ve crashed he’s stuck with a mortgage that’s worth more than the apartment,” she lamented.  His bank “forced” this money on him, she insisted, and so should be forced to share his “loss” of equity. 


Sadly, it doesn’t work that way. But since January the sharp fall in interest rates has reduced the unfortunate man-child’s mortgage by at least a few hundred euro a month, but house prices have fallen a further 6%-8% since January, so he still deeply in negative equity. 


Which is why I thought that a survey last week showing how 80% of mortgage applications are being rejected by the banks was such encouraging news, at least for the newest crop of first time buyers.  


The mortgage lenders are now doing what they should always have been doing: they are not just checking out the applicant’s job security, their credit record and future earning prospects, but also whether the property itself is a good risk. And with record inventories of brand new units unsold, and prices still falling at a pretty shocking rate every month, is it any wonder that the banks are demanding larger deposits and stricter repayment terms? 


The biggest reason that loans are being turned down – with a 45% rejection rate - is the person’s inability to meet long term repayments, says Select Finance Group, the broker consultancy that conducted the research.  It doesn’t say whether this is due to the lender’s concern about unemployment or the inevitability of rising interest rates.  I suspect it’s probably both.   


Select Finance’s conclusion is perfectly clear:  if you want a mortgage loan in this market you better prepare a personal mortgage plan with ‘wow’ factor – as in, “Wow, this person looks like their job is secure…and they’ve got a 20% deposit too!”

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