Say goodbye to interest-only payments, says ISABEL MORTON

WHAT WOULD you do if your bank suddenly increased your mortgage payments from €1,800 to €5,000 per month? Paul and his wife Anne (not their real names) recently received a letter from their mortgage provider (Permanent TSB) demanding that they now pay capital as well as interest on their tracker mortgage.

They’re just one of many couples who availed of the Permanent TSB “Residential Investment” package (available from 2007 to mid-2008), who’ve recently been told that their three-year, interest-only holiday period is over.

At the time, to qualify for a Permanent TSB mortgage, the borrower had to have owned a minimum of two Residential Investment Properties (RIPs) for a period of 12 months or more and had to satisfy the following two key criteria: that “the loan to value of the overall proposed deal is not more than 75%” and “the rent/interest cover is 1.2:1 (repayments calculated as interest only at 1.1% over ECB)”.

More importantly, the lender did not query or question the borrowers’ earning capacity and ability to repay should the unforeseen happen and the value of the properties and rental income take a nosedive.

In their press release at the time, Permanent TSB said, “There is no requirement for current account statements or evidence of income other than a completed Self Certification Declaration Form which is available on www.intermediarynews.ie. This income detail will not be utilised in any calculations”.

In other words: we will trust you to tell us what you earn, we will not check it out, and it will not be taken into consideration as part of the repayment plan for this mortgage.

Unfortunately, the unforeseen did happen and Permanent TSB can no longer afford to facilitate tracker mortgages, as it costs the bank more to borrow these funds from Europe than they are charging their customers. The bank took a gamble in offering the deal to borrowers and it didn’t work out for them.

Luckily for Permanent TSB, however, they included a clause which permitted them to “review” the situation after a period of three years. And so they sent out the “review” letters, which were crisp, clear-

cut and not open to negotiation.

If customers can’t manage to pay off the capital as well as the interest on their loan, then the only alternative on offer to them is to move from the security of a tracker rate to the uncertainty of a variable rate. And, with a threatened rise in interest rates borrowers such as Paul and Anne are now at risk of being badly burnt.

Back in 2008 they considered trading up to a larger family home and as they already owned two small investment properties in addition to their family home, they looked at different options on how they might best facilitate a move.

Their mortgage broker suggested that they were an ideal “fit” for Permanent TSB’s offer for “experienced investors”. The plan was to continue letting their investment properties, as well as their own home, and move temporarily into a house owned by Anne’s family in order to save the required deposit.

By cutting back on everything, including their social lives, and having saved children’s allowance payments, they even managed to put aside money each month, in order to reduce their capital debt.

Events in September 2008 altered this plan somewhat, and Paul and Anne sensibly decided to return to live in their original family home and put off all plans to trade-up. Since then, despite falling rents, they continued to service their monthly mortgage payments of €1,800 without fail, until two weeks ago, when they received their letter notifying them of an increase to €5,000 per month.

They immediately contacted their local bank branch, where they were told “the bank is taking a very black and white view of these cases” and passed on to head office, who passed them right back to their branch, where a representative eventually agreed to meet them.

Their “options package” offered a short, three-months interest-only at 2.85% variable rate (0.85% higher than they had been on) in order to try to attract them away from the tracker rate. The lender was horrified to disocover that there were only two investment properties and that the third had reverted to being their family home. Never having been under any obligation to inform their lender of their changing circumstances, Paul and Anne hadn’t worried about the situation, as they were comfortably servicing their mortgage repayments.

However, as their three properties are cross-charged and one is now their main residence, it is protected under the family law declaration. Their lender is at a loss to know what to do about the situation. What will happen next? I’ll keep you posted.

ISABEL MORTONis a property consultant