Jill Kerby

 

BUYING YOUR LOCAL AUTHORITY HOME DOESN’T ALWAYS MAKE SENSE

 

One of those ‘…and finally” moments at the end of the nine o’oclock news caught my attention last week.  RTE’s Eileen Dunne introduced an item about a lucky group of 36 families who had just moved into newly renovated four bedroom, three bathroom properties on what had been an unfinished ghost estate in Co Carlow.

The families, all of them coming off long housing waiting lists were delighted with not just their beautiful new homes, which had been purchased for a song by a voluntary housing association from NAMA, the national asset management agency that is now allocating thousands of properties for social housing purposes but the low rents of €70-€80 rent each week. Not surprising, one of the tenants loved her house so much she said she would try to buy it some day.

Becoming a homeowner may be hot-wired into every Irish person’s brain, but renting a property from a voluntary housing association and taking out a mortgage is a very different thing.

Even valued at a modest €100,000, this woman would need at least €8,000 as a down payment and would pay a variable monthly mortgage rate of at least c€500-€600, perhaps €180-€250 a month more than her rent. Even higher mortgage interest would have to be factored in – tax relief goes by 2017 - and she would also need to insure the building and the loan (via a mortgage protection policy) and pay not just her local authority charges, but the property tax.

In addition to her existing gas and electricity charges, next year this lady will be paying water charges, which are expected to be at least €150, but could be more depending on usage. Then there are on-going home ownership costs: even the nicest, newest homes need upgrading as they age. All those costs can amount to another €1,000 a year.

Lower income earners, especially those fortunate enough to qualify for high quality, low cost homes should always think twice about buying. (Many housing associations’ policy is not sell these properties anyway.)

By remaining a tenant, this lady will not be committing scarce capital to own ‘a liability’, a property/asset that instead of generating an income eats up her already limited income or savings.

This is why a family home, when you discount its usefulness (or ‘utility’, as economists describe it) as a place of shelter, is always a financial liability until it starts to pay its own way, that is, until it produces an income, via rent, to cover its expenses and produce a profit.

As many have discovered, not every house produces a capital gain either at retirement. Thousands of 50 and 60 year olds, who borrowed against the value of their homes during the boom years to buy what they hoped would be their pension, now find themselves in negative equity. (Some pension…)

The greatest advantage of remaining the low outlay tenant is that they may actually have surplus income or savings that can be used to create a sizeable, long-term nest egg. Their lovely affordable home means they are not pouring excessive rent money ‘down the sink’ or ‘paying someone else’s mortgage’.

Instead, even a modest €100-€200 a month (in the context of what they would be paying for their own mortgage plus expenses) can be deposited in the best (and safest) deposit account, or better still, a conservative, low cost investment fund, or best of all into a conservatively managed, low cost pension fund that attracts tax relief. Also, registered pension funds allow the money you contribute and invest to grow tax-free.

The tax issue is important. Deposit interest is taxed every year in this country at 33%. Investment funds are taxed every eight years and then at exit at rates as high as 36%. In contrast, pension funds allow 25% of the money tax-free at retirement and then your income tax rate. (Pensioners whose entire income from age 65 does not exceed €18,000 a year or €36,000 for a couple do not pay ANY income tax.)

Finding that steady growth, low cost pension investment isn’t easy and requires good professional advice. But the younger you start putting away even that €100-€200 a month, the greater the end result.

The lady in the news clip looked about 30. No matter her family circumstances, she needs to be saving for retirement. More than half the population have no pension savings. Too many are expecting to live on the already in deficit state pension, which will never deliver their expectations.

A steady, monthly contribution of €100 a month, earning a modest 5% net per annum for 35 years (at a cost of just €33,600 net with 20% income tax relief or just €24,780 with 41% relief) would produce a retirement fund worth about €113,600. €200 a month would create a fund worth over €227,000. A 7% return would result in that €200 a month turning into over €360,000.

 

 

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IS BANKRUPTCY THE ONLY CREDIBLE DEBT RELIEF CHOICE FOR SOME? There are now 40 (at time of writing) personal insolvency practitioners (PIPs) registered with the Insolvency Service of Ireland (ISI) and the service is fully open for business as of September 9. That’s some good news in a tough first week for the ISI, even if those numbers are still woefully inadequate.

Another positive snippet is that the insolvency legislation, which did not make provision for the names of discharged bankrupts and insolvent people to be taken off their debt registers, has been amended. Now these names will remain only for the duration of their insolvency or bankruptcy and for three months thereafter. We’ll return to the implications of this information being made public (in a small place like Ireland) another time.

So much for the good news. Anyone who listened to Drivetime and Liveline last week or read the reports of the interviews that PIP Jim Stafford gave to RTE presenters Mary Wilson and Philip Boucher Hayes, will know that all is not well with the new system.

Regular readers of this column would have been alerted to its problems months ago. For example, the Stafford interviews highlighted how insolvent, but higher income professionals (doctors, lawyers, accountants) are likely to be favoured by the system over ordinary PAYE-income earners, not because of their reportedly higher social status, but because of their higher commercial status with their creditors. Those creditors are likely to make more debt write-down concessions and accept shorter discharge periods because the debtor has more investment assets and higher incomes with which to pay them.

The interviews also revealed how many PIPs will cherry pick for higher income/asset clients because they can afford to pay the PIPs upfront fees and because creditor banks are more likely to them to front-load their remaining fees if – a big if – the debt arrangement terms, like widespread split mortgages, are to the banks’ liking rather than, say, mortgage write-down.

Stafford, in his second interview with Philip Boucher Hayes, also noted that there is no evidence that the banks are willing to write off mortgage debt for PAYE only debtors. Until this happens, he said (and it could be a year before the banks wake up to this reality, he said) he’d be recommending that clients avoid the formal ISI process and risk courting failure as the ISI’s ‘guinea pigs’.

But how long can someone wait to get closure to their already deeply stressful insolvency problem? Many financial advisers insist that they are already doing mortgage write-off deals with the banks even if most of them (including the €135 million AIB claims it has written off) are buy-to-let ones.

Insolvency expert Paul Carroll of www.neofinancialsolutions.ie (who is awaiting PIP approval) has just published The Irish Bankruptcy Guide, a sister publication to his Irish Insolvency Guide. He believes bankruptcy might be that sustainable solution where the banks are refusing to write-down some family home debt “and it might not involve the loss of the family home in every case.”

According to Carroll, a practising accountant and UK discharged bankrupt himself (giving him a unique insight into the process), bankruptcy will result - in your income and any assets being turned over for three years to a High Court appointed Official Assignee (OA) who will undertake to sell and redistribute those assets “except those necessary to run a business, your personal items and furniture” to your creditors;

- you will be unable to borrow more than €630 or open bank accounts without the permission of the OA. Old accounts will be closed;

- large salaries may result in attachment orders and social welfare payments are not subject to attachment orders, but “reasonable living expenses” will be permitted out of your income;

- unless you have very valuable items of furniture or jewellery your household and personal possessions will not be sold. If your car is not valuable or is leased, it will not be sold;

- occupational and private pension payments during bankruptcy will be treated as income and can be part of the credit settlement; - inheritances, income increases, windfalls will be subject to further distribution to creditors during your bankruptcy.

Where the family home is in arrears and in serious negative equity and therefore represents no value for the OA to sell and redistribute, chances are, says Carroll that you may keep your home or the bankrupt’s share might be able to be sold to their solvent partner. Bankrupts end up debt-free at the end of the three years.

Compared to how some discharged PIAs could end up “with only their unsecured debts written off after six years; the loss of tracker rates; mortgages extended by another 10 years or with split mortgages that still have to be cleared some day” – regardless of whether they are still in negative equity – “bankruptcy, however difficult, is an option that should not be dismissed,” says Carroll.

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WHAT TO DO WHEN THE MORTGAGE REPOSSESSION LETTER ARRIVES

So what can distressed mortgage-holders take away from last week’s grilling of four bank bosses (AIB, Bank of Ireland, Ulster Bank and PTSB) by the Oireachtas Finance Committee members?

First, the Committee was given a confused and incomplete picture of the ‘long term and sustainable’ mortgage solutions that the banks are being compelled to put in place by the Central Bank. Three out of four of the banks categorically insisted they are not writing down arrears though most advisers who are representing clients say they do, but only on a case-by-case basis and especially with buy-to-let owners.

Meanwhile, the banks have sent out at least 10,000 letters threatening repossession to customers who they claim have not ‘engaged’, some for up to three years or who are not paying enough or anything, off their loans. (A time-consuming audit of the banks’ resolution measures is underway by the Central Bank.)

‘Strategic defaulters’, claim the banks are people who have sufficient income, savings or other assets to pay their loans with but choose not to. However, many advocacy groups say a distinction has to be made for homeowners who are not paying their mortgages because they are forced by other unsecured creditors like car finance lenders or credit card providers to pay those loans first.

The committee were also given a confused and incomplete picture of the ‘long term and sustainable’ mortgage solutions that the banks are being compelled to offer by the Central Bank. While the committee were told that c1600 offers of split mortgages were made by the banks by June – this is a favourite but not necessary ideal solution - only a tiny number, about 143, have been accepted and only 17 processed.

Other loans are also being restructured – as interest only, extended terms, lower interest rates (Ulster Bank has been more creative in its thinking than the others by lowering the entire rate of some mortgages to just 0.95%), debt for equity and voluntary surrender.

But again, the numbers are low compared to the huge number of “pay up now” or we’ll repossess “offers”. Insolvency practitioners and other advisers I’ve spoken to are not overly impressed by the banks’ insistence that they will not be writing down mortgage debt. Richie Boucher of Bank of Ireland, they say, was the most direct when he said that debt-write downs and restructurings “come at a cost” and his bank was focussed on profits, not losses. This also explains why B of I (which is only 15% owned by the Irish state) is charging full interest on all split loans; the others are waiving interest payments on the part of the ‘warehoused’ mortgage, though all will expect that set aside portion to be fully repaid when the mortgage term matures.

A common thread of advice is running through my conversations with insolvency practitioners and financial advisers since the committee hearings. They all think the thousands of repossession letters are part of a game of bluff, to get people to engage and accept whatever deal is put before them, such as voluntary surrender or split loans.

They recommend that you:

1) Contact the bank immediately and seek a meeting.

2) If you haven’t done so already, fill out the MARP personal financial statement (see www.mabs.ie) which sets out your income, assets and liabilities.

3) Get advice from an impartial adviser like MABS, a private accountant or financial adviser, ideally before, during and after the meeting. This person can then interpret the banks’ offer and whether it is suitable.

4) If the banks’ ‘long term and sustainable’ offer is not to your liking, challenge or reject it and suggest a different one.

5) If the offer involves voluntary surrender, be aware that the bank will pursue you for the shortfall, so negotiate for the write-off of the shortfall. If the bank rejects this, consider that after a voluntary surrender you can apply for a Debt Settlement Arrangement (DSA) for up to €3m worth of unsecured debt, that is, the shortfall. At the end of a 5 year discharge period of the payable debt, you will be debt free.

6) If you are determined to keep your family home, and the bank does not offer a genuine long term and sustainable offer, consider a Personal Insolvency Arrangement (PIA). Be aware that 65% of creditors must approve the arrangement, ideally that includes some write-off of both secured and unsecured debt. If the mortgage lender has already rejected a deal, and they are your biggest creditor, they may not accept a PIA proposal.

7) Borrowers who are getting nowhere with their banks in securing a suitable deal or PIA, may have to call their creditors’ bluff and threaten the banks with bankruptcy, which will leave creditors with very little.

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RETURNED IMMIGRANTS DISCOVER UNEXPLODED FINANCIAL BOMBS We are a nation of emigrants, with a particularly large flow of people out of the country at the moment. Nevertheless, many who left in the 80s and 90s did return during the boom years…and may only now be discovering that they came back with unexploded financial bombs in their luggage. One such couple, now aged 50, emigrated to Australia in the 80s, eventually bought a home there in 1993 but after their first child was born, returned to Ireland. They have lived modestly, bought a house (and will clear the mortgage seven years early) and are good savers. They both have pension policies. However, they made a common mistake of returned emigrants: they didn’t bother to cancel insurance and investment policies they took out all those years before in Australia. The reason they contacted me was because of the articles I’ve written lately about the “bombing out” of whole of life assurance policies, widely sold here in the late 1979s and throughout the 80s and 90s. (Some life companies and brokers still sell them - to their shame.) They thought an Australian “term” insurance policy they bought in 1993, with a fixed death benefit of just the equivalent of €114,000 each, but with a premium that increased every year (from €279 in 1993 when they were age 30 to a whopping €930 a year today) might have been a whole of life one. The cost of this policy was now becoming prohibitive and they were considering cancelling it. Whole of life policies are often misrepresented as being ‘even better’ than a straightforward term life insurance (or convertible term) policy with a fixed premium, death benefit and payment term. The broker, who receives a huge commission on its sale, talks up the investment fund part that can be encashed if the buyer “ever needs some money”, perhaps for a child’s education, a home downpayment or another pressing need. What the broker doesn’t explain properly is that even though these policies are always more expensive anyway, the original premium is nearly always underpriced. Meanwhile, the premium is only reviewed after the first 10 years and every five years thereafter, but because you have aged and are now at greater risk of dying, will result in sharp increases in the premiums. If investment returns are poor, the charges are high and the investment fund has been raided by the insurer over the years to pay the rising risk/cost of the life cover, a bomb- out is almost inevitable. Our returned immigrants never understood what they were buying back in 1993. They kept this policy, and an expensive income protection one (with fixed annual premiums of €900) her husband, a chef bought in Australia that he was told would cover him wherever he worked in the world, because they did know that after 10 years or so, any replacement policies in Ireland would be cost adjusted for their age (or if they now had any medical conditions.) An accountant and lawyer they consulted when they bought their Irish home gave the two Australian policies a cursory glance and said they were fine. Unfortunately, they weren’t fine. So far, a fee-based financial adviser they have consulted has determined that their so-called Australian ‘term’ insurance policy appears to be a rare, expensive product in which the premium was set relatively low at first but then increased each year relative to their rising ages but without any rise in the benefit. When high administration charges and exchange rates were taken into account, it proved to be very expensive and the rising premiums are no longer affordable. The couple were verbally informed by a clerk when they were leaving Australia that they could just keep paying their premiums, but they never received a written confirmation. “Nearly every life company includes a clause that says if you leave the jurisdiction for more than a set number of days without a written confirmation your policy will be null and void. (Even health/travel insurers restrict absences to c30-60 days.) Spending almost €30,000 on just two, relatively modest, but probably invalid life and income insurance products has come as a shock to this couple. They were just lucky they never had to make a claim. But many returned Irish are discovering that the insurance, investment and pension policies they took out in good faith may not be valid in this jurisdiction and even if they are, the benefits may be subject to higher tax treatment by the Irish Revenue because they do not conform to EU and EEA purchase and tax directives. Even foreign bank accounts may inadvertently be the cause of a higher tax bill or penalties and surcharges if they have not be properly declared and many US/Irish citizens are completely unaware of their tax-reporting responsibilities, especially under the new FATCA legislation. The best advice: always check out Irish legal and tax requirements before you maintain or bring home a foreign financial product.

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