Myself and my husband are coming up to the end of the term on our interest only mortgage.
This was a great option for us at the time, we have never missed a payment but when we raised the topic of extending it with Pepper, who now owns our mortgage, we were told we cannot extend as they are not a lender.
My husband is 67 and I am 62. We are both now retired. We do plan to downsize, but realistically not for another 10 years.
We have good pensions, but modest and can afford to continue to pay interest only. Our mortgage is €90,000 and is now at 4.5 per cent, which has come back down recently.
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Are there interest only mortgages available?
Ms J.B.,
Interest only mortgages can be a good option but they require quite a bit of discipline.
The product is designed specifically so that the principal is paid at the end of the term, which is precisely where you find yourself now.
The good news is that this clearly suited you at the time and, better still, you have a perfect record of payment since you started this arrangement. But your query leaves quite a few issues unanswered.
Your outstanding mortgage is €90,000 but the property is substantial enough that downsizing is on your horizon, so why not just do that? More importantly, you are on an interest only mortgage which, certainly these days, is not a product widely available to residential mortgage customers. Why are you on that?
Bank of Scotland was one of a few lenders that accommodated this market back in the Celtic Tiger days but that tended to be for people on strong earnings who were reaching to the end of their affordability range.
Those Bank of Scotland mortgages – which are now managed by Pepper, I gather – were usually given at a tracker rate. You say you are paying 4.5 per cent which is certainly a big margin on a tracker where bank lending margins were more normally around the 1.2 percentage point level.
So I am not clear if yours is one of these Bank of Scotland mortgages dating back 20 years or more, or whether it is a more recent agreement which might have come about as a result of mortgage distress.
Either way, your options are limited to one of the following. You can pay off the loan on maturity, sell the property and downsize or seek a new loan.
Frankly, the best option here in your circumstance seems to be downsizing and I am not sure why, in the circumstances, you are not willing to consider for at least another decade unless you have children still living at home.
Even if so, these would likely be of working age and if they cannot afford to buy their own home – which is very possible – they should at least be able to contribute to the cost of your home, if only so that you do not lose it, leaving all family members in crisis.
You are both retired, albeit still fairly young, but on what you class a modest pensions. Downsizing would free up equity to pay off what is, these days, a fairly modest outstanding mortgage. You should be able to find a place that will allow you to live mortgage free.
The second option is to find a new lender. As Pepper says, it manages loans, it doesn’t issue them. If you are looking to roll over your mortgage for a further term, you will need to look elsewhere.
The best available rate on the market right now – assuming this €90,000 mortgage balance accounts for less than 60 per cent of the value of your home – is the 3 per cent rate being offered by PTSB. This is fixed for four years; at that point, you will have to roll over to a variable rate or fix again at whatever rates are available at that time.
On a €90,000 loan repayable over 10 years, this would cost you €870 a month. It’s not a huge amount by modern mortgage standards but whether you can afford it is the issue.
You say you can afford to pay interest only. At the moment, you are paying just €337 a month or €4,050 a year. I think you are going to struggle to find anyone will to lend to you on that basis.
These days, interest only loans are really only offered on buy-to-let properties and even then, rarely.
The only mainstream lender I know of who is available to you as a residential mortgage customer is ICS Mortgages, which does have a mortgage with an interest only element. It offers a two year interest only period on its five-year fixed rate of 4.15 per cent but you will be expected to pay down the principal as well as the interest after those two years.
That aside, you are looking at specialist lenders, such as Spry Finance. It specialises in making loans to older people who do not have the financial muscle to manage a normal repayment mortgage but it does come at a price, and there are conditions.
Most important for you, the amount they will lend depends on the value of your home and the age of the younger borrower – in this case, you.
For someone aged 62 looking to borrow €90,000, your home would need to be worth €530,000. And the current interest rate Spry is charging is 6.7 per cent – well ahead of lenders in the more mainstream mortgage market.
Spry works on the basis that the loan balance simply accumulates until the property is sold or the mortgageholder dies, at which point it becomes available.
Assuming you would sell to downsize in 10 years, the outstanding balance on your €90,000 loan would have grown to €176,134 thanks to the glories of compound interest.
Spry does allow partial repayments so if you continued to pay the €337 a month you are paying now, the loan would have grown to a more modest €118,746 a decade down the line. It’s still not cheap but....
In terms of what that would leave available to you for downsizing, that depends in part of prices in the property market over that period. Let’s be very cautious here and say the property grows in value by 2 per cent a year. Ten years form now, your €530,000 home will be worth close to €650,000.
After paying off the €118,746 balance of your Spry loan, you would have around €530,000 left to buy your new home. Even though €530,000 will not buy you as much at that point, it should still allow you to downsize.
Clearly, property prices are rising by multiples of 2 per cent right now, According to the CSO residential property price register, prices nationally rose 7.8 per cent in the 12 months to June, and by 6.6 per cent in Dublin. So the value of your home could certainly rise more dramatically but, in your position, it is very much better to underestimate these things than overestimate them.
Living on hope, or without forward planning, would appear to be part of what has got you to your current position.
The third option – paying off the loan when it falls due at the end of your interest only term in the coming months – seems to be an absolute non-runner from what you say, unless you are fortunate enough to have family who could offer such finance.
There is one other option. One or both of you returns to work to be able to earn enough to pay a more traditional repayment mortgage going forward. Again, at your age, banks will be sceptical on repayment capacity so, if it was an option, this is something you should approach through a mortgage broker who will have a better idea how such an application should be presented and to which lenders.
Realistically, I think your two options are to downsize now or to consider a loan with Spry Finance or some similar lender.
If you do go with Spry, you really need to make sure you read all the terms and conditions. There is no guarantee that health or other issues will allow you downsize in a decade. Depending on how long you live and the value of the home, your Spry loan could consume all your equity in the home, leaving nothing for inheritance.
The only thing Spry commits to is that your loan balance will never exceed the value of your home.
That’s fine in my book if you are able to live these years in some comfort and peace of mind but it can be a big issue for Irish families.
But of course, if your home is not worth €530,000 at this point, then, even with Spry, you won’t be able to borrow €90,000.
The bottom line is that you have a €90,000 bill looming and some tough choices. Failure to repay or put some other funding in place could see you lose your home.
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, with a contact phone number. This column is a reader service and is not intended to replace professional advice.
