I have a tracker mortgage of €100,000 and a variable mortgage of €80,000. I recently was left €150,000 in my father’s will. I wish to use these funds to reduce my mortgage.
What is the best way to do this? Could I negotiate to swap the tracker for a variable rate so as to reduce the outstanding amount of the tracker loan and then pay off both loans fully?
Mr G.A., email
There's a bit of ambition here here but I think you overestimate the willingness of the bank to consider such deals. At least you have the good fortune, through your inheritance from your father, to make choices.
You have a mortgage of €180,000 on your property, the larger part of which is down 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 tracker mortgages on their homes and then traded up in the dying days of the Celtic Tiger, or since.
Banks were no longer offering trackers but buyers were often allowed to carry over their tracker mortgage loan to the new home – even if the margin above the ECB rate was sometimes increased in the process. The balance would be made up by a separate mortgage at either a fixed or variable rate.
Now, with this inheritance, you have decided you want the piece of mind of being almost mortgage free on your home.
The obvious first move is to pay down the most expensive loan first. This is inevitably the variable rate loan and this is the one you should tackle first. But you’ve a more ambitious approach.
You want to approach the bank, with an offer to switch your tracker loan to a variable rate loan as long as they reduce the balance by €30,000. You then want to turn up a day or so later to fully pay off your remaining reduced mortgage with the amount you have received in your inheritance.
It’s a cunning plan but I cannot see it working.
Bank reluctance
First up, banks are very slow to write off debt. Unless they fear the alternative is that you simply won’t be able to pay the loan off at all and that they will be on the hook for more than this €30,000, there is no reason for them to even consider it.
And, as I understand it, there will be nothing in your personal or professional finances to suggest you are anywhere near this position. This is not something you want to do because you have no other financial wriggle room; precisely the opposite, you simply want to take as much advantage as possible of the increased financial wriggle room this inheritance will give you.
From the bank’s perspective, on a pure bottom line basis, given the difference between tracker rates and the best current variable rates on offer – about 1.5 percentage points – the bank would be unlikely to make up the €30,000 discount even if your mortgage had over 20 years left to run. And they will crunch the numbers.
Second, ever the dimmest lending officer is going hear alarm bells going off if a customer approaches with an offer to voluntarily switch to a more expensive loan for no obvious reason. And lending officers tend to be fairly bright. They would need you to be able to explain to them why such a move makes sense from your perspective.
And, of course, it doesn’t.
Ireland’s banks are currently paying a heavy price, financially and in terms of reputational damage, for their behaviour during the tracker mortgage crisis when they effectively refused people access to tracker loans to which they were entitled or charged more in interest than they should.
In that climate, the idea of a bank entering an arrangement it knows is to the detriment of the customer with the prospect of regulatory review down the line is fanciful.
The only reason for doing such a thing is to lower the loan sufficiently to allow you pay it off summarily with your existing financial resources. The bank will suspect this is the case – as it is the only reasonable interpretation.
And it will certainly not be keen to give a €30,000 discount in the anticipation of greater loan interest payments over the planned life of the loan if it suspects there might be zero benefit to it from such an arrangement because you intend to pay the entire sum off immediately.
There is nothing to stop you approaching the bank with such a suggestion, of course. I very much doubt they would consider it, given the regulatory concerns. Even if they did, any discount they give you would, I suspect, be nominal.
So that leaves you with the more prosaic option of paying off the more expensive variable loan in full and using the balance to knock €70,000 off the existing tracker loan.
Strategy
For what it is worth, if you really are determined to pay down the mortgage, the best way to do so as quickly as possible is to continue to make the monthly payments at the existing rate. With just €30,000 left on the loan, that will accelerate the point at which you are mortgage free.
The alternative is to reduce your monthly mortgage payments so that the loan continues for the full planned 20- or 30-year term while leaving you with noticeably more disposable income on a monthly basis.
I’d strongly advise against this second approach unless you are currently under severe financial stress. It will mean you paying far more in interest costs on the loan than you need to and, clearly, will mean the mortgage hanging around your debit column for a considerably longer time. It seems to run counter to your stated intention of getting rid of this loan as soon as possible.
In either case, you will need to check the bank’s default position on the continuing repayment of this mortgage after you pay off the €150,000. I would not be surprised if the default was simply to lower the payments and continue on to full term, in which case you will need to intervene and advise the bank that you want to continue to make monthly payments at the rate you do so currently.
Do this in writing. As regular readers of this column will 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 use your increased financial resources to pay down any other expensive debt first – such as credit cards, overdrafts or personal loans.
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
