I have a tracker mortgage of €100,000 and a variable mortgage of €80,000. I recently received €150,000 in my father’s will. I want to use these funds to reduce my mortgage.
What’s the best way to do it? Could I negotiate to swap the tracker for a floating rate to reduce the outstanding tracker loan and then pay off both loans in full?
Mr. GA, e-mail
There is a bit of ambition here, but I think you are overestimating the bank’s willingness to consider such transactions. At least you have the chance, thanks to your inheritance from your father, to make choices.
You have a €180,000 mortgage on your property, most of which is due to your tracker. This would not be an unusual feature of the Irish property market and would have been quite common among those who had follow-on mortgages on their homes and then traded around the time of the Celtic Tiger’s death, or since.
Banks no longer offered trackers, but buyers were often allowed to roll over their tracker mortgage to new housing – although the margin above the ECB rate was sometimes increased in the process. The balance would be a separate fixed or variable rate mortgage.
Now, with this inheritance, you’ve decided you want the peace of mind of being nearly mortgage free on your home.
The obvious first step is to pay off the most expensive loan first. It is necessarily the variable rate loan and it is this that must be tackled as a priority. But you have a more ambitious approach.
You want to approach the bank, with a proposal to switch your tracker loan to a variable rate loan on the condition that they reduce the balance by €30,000. You then want to show up a day or two later to fully pay off your remaining reduced mortgage with the amount you received in your inheritance.
It’s a clever plan but I don’t see it working.
First of all, the banks are very slow to cancel their debts. Unless they’re worried that the alternative is that you just can’t repay the loan and they’ll have to pay more than that $30,000, there’s no reason for them to consider it.
And, as I understand it, there will be nothing in your personal or professional finances to suggest that you are getting closer to that position. It’s not something you want to do because you don’t have any other financial leeway; instead, you just want to make the most of the increased financial leeway this inheritance will give you.
From the bank’s perspective, on a bottom-line basis, given the difference between trailing rates and the best floating rates currently offered – around 1.5 percentage points – the bank is unlikely to catch up. discount of €30,000 even if your mortgage had more than 20 years to run. And they’ll crunch the numbers.
Second, never will the darkest loan officer hear the alarm bells if a client approaches with an offer to voluntarily upgrade to a more expensive loan for no apparent reason. And loan officers tend to be pretty smart. They would need you to explain to them why such a decision makes sense from your point of view.
And, of course, that is not the case.
Irish banks are currently paying a heavy price, financially and in terms of reputational damage, for their behavior during the follow-on mortgage crisis when they effectively denied people access to the follow-on loans to which they were entitled or charged more interest than they should.
In this climate, the idea of a bank entering into a deal it knows is to the detriment of the customer with the prospect of subsequent regulatory scrutiny is fanciful.
The only reason to do such a thing is to reduce the loan enough to allow you to summarily repay it with your existing financial resources. The bank will suspect that is the case – because that is the only reasonable interpretation.
And he certainly won’t be keen to give a €30,000 discount in anticipation of larger interest payments over the expected life of the loan if he suspects there might be no benefit to be gained from it. such an arrangement because you intend to pay the full amount. immediately.
Nothing prevents you from approaching the bank with such a suggestion, of course. I highly doubt they would consider it, given the regulatory concerns. Even if they did, any discount they gave you would be, I guess, nominal.
This therefore leaves you with the more prosaic option of paying off the most expensive variable loan in full and using the balance to reduce the existing follow-up loan by €70,000.
For what it’s worth, if you’re really serious about paying off the mortgage, the best way to do it as quickly as possible is to keep making the monthly payments at the going rate. With only €30,000 left on the loan, it will speed up when you are mortgage free.
The alternative is to lower your monthly mortgage payments so that the loan will continue for the full expected term of 20 or 30 years while leaving you with significantly more disposable income on a monthly basis.
I strongly advise against this second approach, unless you are currently in serious financial difficulty. This means that you will be paying much more interest on the loan than necessary and, clearly, the mortgage will remain in your debit column for a considerably longer period. This seems to go against your stated intention to get rid of this loan as soon as possible.
In either case, you will need to check the bank’s default position on continuing to repay this mortgage after paying off the €150,000. I wouldn’t be surprised if the default is to simply cut payments and continue to term, in which case you’ll need to step in and let the bank know you want to continue making monthly payments at the rate you currently do.
Do it in writing. As regular readers of this column know, my strong advice is that you should always confirm any interaction with your bank in writing.
Oh, and before you do anything with the mortgage, make sure you’ve used your financial resources to pay off any other expensive debt first – like credit cards, overdrafts, or personal loans.
Please send questions to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street, Dublin 2, or email email@example.com. This column is a reading service and is not intended to replace professional advice