Financial Products Explained

Mortgage types:

 

Annuity: This is the most popular choice of mortgage. Each repayment covers the interst owed plus the capital borrowed. The amount goes down each year. It is a slow process as the Interest owed is based on the capital borrowed. It could take ¾ of the mortgage term to pay ½ of it off.

Endowment: Not a popular option anymore but they still exist. The mortgage is not repaid until the end of the term. The mortgagor does make Interest only payments and also makes a payment into an investment fund that should, upon  the end of the mortgage term, mature, hopefully to the extent that will allow the mortgage capital to be repaid.

 

This is based on the performance of investments, which can go down as well as up. It means a shortfall can occur and upon maturity the fund has not reached the required level to repay the mortgage.

Current Account: New style account. Mortgagor would have a current account tied in with their mortgage. Designed for account holders that would have considerable savings. The balance in the current account is offset against the mortgage balance and thus, reduce the interest payment and overall, the mortgage repayment.

Tracker: This is where the rate given by the bank tracks the ECB (European central bank) rate. The ECB rate is the rate that all lenders within the Euro zone operate. They then add a margin on top of the ECB rate. Currently the ECB rate is 1%. Your bank may give you a margin of +.75%. This then means that your mortgage repayment is based on 1.75%. Should the ECB increase their rates, you are guaranteed to stay within .75% of the increase. The same will happen should the rate decrease.

This rate is variable. Due to the attractiveness of this rate the banks are no longer offering these rates to new clients. Some existing clients can still avail of it as they may have tied into a fixed rate that had a roll over clause. i.e. 2 year fixed rate with a roll over to tracker +1%

Fixed rate: The interest rate is fixed.. No matter what happens to the market the rate will remain the same for the selected term. The repayment will remain constant for that same time frame. Selecting a fixed rate is a bit of a gamble. You select a rate and hope that the variable rate does not drop. If during the fixed term period the variable rate does increase then the decision to fix was justified.

Selecting a fixed rate offers good peace of mind. Should you chose a 3 year fixed rate you will know exactly what is going to be coming out of your account for 36 months. It allows for budgets to be kept to. 

Heavy penalties exist for breaking out of fixed rates. Banks tend not to divulge the calculating process for coming up with these figures. They are based around the term remaining on the fixed term, the overall term of the mortgage and the mortgage balance.

A bank should not penalise you should you be selling your home and clearing your mortgage that way rather than switching to a different lender.

Pension backed mortgage: This is an endowment type mortgage. Rather than making a payment into an investment fund, the payment is made to a pension scheme. It is best suited to a self employed person/ Company director. The reason is down to the tax relief that the person will receive on their pension contributions. The mortgage is then repaid upon retirement when the pension fund matures.

Mortgages and the current economic turmoil:

Banks have basically closed for business. Those that are lending are doing so to a select band. The banks ideal clients are Doctors, Civil servants and Nurses. The pervious group of ideal clients contained Solicitors, Architects and construction employees. Due to the decline in the construction industry these groups have been most affected.

As a way of attracting their ideal client, the banks have become stricter in their underwriting process. This is to be welcomed and it is something that should have been carried out previously. However, they have started to pick up and the smallest of things, mainly on bank accounts. Should a client show an online betting account they may refuse the application. Should someone show excessive Visa repayments (even if everything is ok with the card) they may refuse it also. To say that new applicants should be squeaky clean is an understatement.

Negative equity: Like most people who have purchased within the last 4-5 years and purchased at a LTV (Loan to value) of between 80%-100%. You may now find yourself in negative equity. This simply means that the value of your home has now fallen below the balance of the mortgage.

This has a number of effects. Firstly, You will be unable to move lenders. All mortgage lenders operate on the basis of LTV (LOAN TO VALUE). This means you need at least 90% LTV to even move your mortgage.

 Secondly, Should you will be unable to sell your home and trade up. The sale of your home will not result in enough finance being generated to clear your mortgage balance. No lender will offer finance under these circumstances

Thirdly, You may decide to stay in your home for the foreseeable future. Perhaps you would like to add an extension on. You will be unable to release funds in the form of a mortgage. This is due to the bank only refinancing when there is enough equity in the property to allow it to. You may have to borrow under personal terms with your bank or credit union. The rates will be higher and the term will be shorter than a mortgage. This will result in higher repayments when compared to a mortgage.

All we can do for the moment is wait and see what the market will do. Valuers are nervous about over valuying properties as they are been closely monitored by the banks. They are part of the panel of valuers that each lender accepts valuations from. The last thing a valuer needs in the current climate is to be removed from a banks panel. As soon as lenders start to lend again we may see FTB’s test the waters. The thousands of empty houses and apartments may start to shift and the housing market may start to shift again. It will not return to the levels that we saw before. It will result hopefully though in your home value becoming more equitable with your mortgage.

 

Insurances:

There are four basic types of Life insurance.

• Term or temporary Insurance
• Whole of life Insurance
• Endowment Insurance
• Disability and Illness Insurance

The insurance that most of us are familiar with is Mortgage protection. This is an insurance that is mandatory if you take out a mortgage. It is a policy that reduces in cover year on year. It is designed to pay off the balance of the mortgage should the mortgage holder die during the term of the mortgage. There is no encashment value and once the term expires the policy ends. It is a temporary insurance.

Term assurance is for a specific amount of years. The amount of cover generally stays constant for the amount of time. Should a claim be made on a term assurance policy an amount can be returned to the estate of the claimant. This depends on whether the policy is used to protect a mortgage or if it is used to cover a family or couple. Term assurance will also end once the term expires.

Whole of life policies do exactly what they sound like they should do. They will cover the policy owners for all of their lives. The policy will pay out as it covers an eventuality not a possibility like the previous two insurance types.  This can be seen as a saving element although the saving is for your dependants after your death.

With Endowment policies the savng element is uppermost. The actual sum payable on death is relatively small per premium euro compared with term or whole of life assurance. They are best viewed as a method of saving or investing rather than the pure protection assurances listed previously.

Dissability/illness/income protection insurance are all designed to offer an income in the event of you being unable to work due to ill health.

It is important to know for how long will your employer be able to pay you once you stop working. It is worth noting that an employer is not legally bound to offer you any income should you be out of work. They generally do. It is the period of time that they do pay you that is important. Should you be self employed your earnings may be zero should you be unable to work. You are entitled to nothing under the social welfare benefit scheme.

For PAYE employees you are entitle to approx. €11,000 per annum through the Social welfare system. Will you be able continue to pay your mortgage, bills, loans and general lifestyle expenses on €11,000 p.a?

If not then Income protection is required. The main benefit is that it will pay you from the time that your employer stops paying you. It will pay you until you either return to work or retire. It pays you up to 75% of your gross basic salary less your social welfare benefit and the premium is a tax deductable expense.

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