I have a property down the country which I bought with the intention that it would serve my retirement. However, it is in massive negative equity and to sell would yield only approximately one-third of what I paid.
I had a tracker mortgage and this was sold when KBC closed to a company called Pepper which I know nothing about. There have been three raises in the interest rate since it was taken over.
What I would like to know is: should I just sell up and pay off the mortgage or should I keep it but clear the mortgage? I’ve now retired and want to have as little outgoings as possible on my small pension and have only one in the family to whom it would transfer eventually. If I just sell now, I would suffer the loss but be less burdened with paying a mortgage that is rising.
My gut instinct is to sell and just clear the mortgage but I know nothing about Pepper which now owns the mortgage other than being told it is a vulture fund and may be hard to deal with. I get about 6 per cent return annually.
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You’ve been very unlucky here. Not only is the property you bought worth just a fraction of what you paid but you are now facing higher costs on the mortgage loan associated with it.
I think there are two things to consider. The first priority is your financial position and the next is to look again at your original plan for this property.
Starting with the financial position, you don’t say but I am assuming – not least from your mention of a small pension – that the original intention was that the mortgage on this investment property would be paid off at or before retirement. This would be standard practice both for small investors and also for lenders who are wary of extending repayment periods beyond people’s earning lifetime.
The mention of Pepper backs this up. KBC, which was among the most competitive lenders in the mortgage market for a time, has announced it is leaving the Irish market and is currently in the process of closing customer accounts. However, it has not gone yet and, given the slow pace at which it and the other departing bank – Ulster Bank – are persuading customers to sort their financial affairs, it might be some time yet before it finally gets to close the Irish operation.
However, it is true that some of its mortgage book was transferred to Pepper.
Back in August last year, KBC announced it was selling some of its mortgage loans to a fund called Braunton Property Finance, a business owned by a private equity group called CarVal. CarVal is active in acquiring what are known as distressed loans and is among a group of investors sometimes referred to as “vulture funds”.
That deal, which was completed in February of this year, involved €1.1 billion of what KBC classified as non-performing loans, including some buy-to-let loans like yours. Non-performing means they have at some point fallen into arrears and are either still in catch-up mode or have only recently got fully back on track.
Pepper Finance, which is regulated by the Irish Central Bank, was nominated by Braunton to hold legal title on the loans so it is seen as the owner of your loan in Irish law and it also manages the debt.
So the assumption is that you had some issues with the loan that would explain it still being owing after you have retired. The question for you on this side of things is the length of time left on the loan and the amount of your pension it is costing you on a monthly basis.
If your financial circumstances are that you cannot meet your agreed payments, or that you have to borrow elsewhere to do so while meeting your other living costs, then you certainly need to give serious consideration to selling the property and paying off what is left of the loan – even at a loss. The alternative is that you are going deeper into debt on the mortgage or that you are paying even higher interest rates on personal or credit card borrowing, neither of which seems to make much sense.
You are also facing the prospect of further increases in the mortgage rate. Being on a tracker rate, you’ll have automatically seen your interest rate jump by half a percentage point in July and by three-quarters of a point in September and again last month. Another increase of at least half a percentage point is likely this month and that trend is expected to continue into next year. That’s clearly a factor to consider.
However, if there is not long left on the loan and you can manage it from your reduced financial resources without undue financial pain, it is worth looking back at why you bought this property in the first place.
Property purchase has long been a favoured approach among Irish people looking at how to maximise an income in retirement. The physical ownership seems to give many people more comfort than investment in a private pension, regardless of the generous tax relief available.
Falling into negative equity was clearly never in the plan but it only becomes an issue if you are selling. Meantime, you say you are getting a 6 per cent yield on the property against the amount you invested in it. That clearly seemed like an attractive option for you back when you bought the property and it is not out of kilter with current gross yields – before costs, tax, etc.
And as for the negative equity? Either that position will improve over the coming years or it will be an issue for the family member inheriting. And, as they will have paid nothing for the property, the loss is not a personal financial blow to them. Whatever else, I would not let your decision be clouded by what this family member might inherit. Your primary concern must be your own financial wellbeing.
Selling the property would incur a loss against the overall cost and mortgage payments, but presumably not against the outstanding mortgage. So it would give you a lump sum of some sort but you are sacrificing the future income stream that the 6 per cent yield will give you to boost your pension in future years.
In terms of dealing with Pepper, it is bound by the same consumer protection code as all other lenders and also the Code of Conduct on Mortgage Arrears. The difficulty is in trying to switch mortgage product or to another lender.
If the loan is impaired, it’s most unlikely another lender will consider it and, even if they did, there would be legal and other costs that might not make it worthwhile unless there is a reasonable amount of time owing on the loan.
People on trackers are also being advised to at least weigh up the sense of moving to a fixed rate which, at most lenders, are not rising as fast as tracker rates. Even if it makes sense for you, it might not be something that Pepper facilitates and it has certainly passed on the full impact of the ECB interest rate increases to its variable loan rate customers.
In sum, the main argument for cutting and running now is that you simply can no longer afford the loan. If that’s the case, fair enough; otherwise the promised retirement income stream is still delivering as per your original plan and you should probably consider sticking with it and not worrying about the negative equity.
Please send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street Dublin 2, or by email to dominic.coyle@irishtimes.com. This column is a reader service and is not intended to replace professional advice
