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Tuesday 21 November 2017

Dan White: Why it is best to pay off mortgage arrears now

Dan White answers your financial questions.

I first took out a mortgage with First Active in 2004 for €250,000 at a 3.53pc variable interest rate. My monthly repayments were €1,126.80 for 360 months. I fell into arrears between July 2007 and February 2008. The arrears came to €7,000. I subsequently cleared these arrears.

From March 2008 until May 2009, I fell further into arrears. I have now got back on my feet and have being paying back €1,753.51 a month since then.

When I started paying them off in June 2009 my arrears totalled €21,338.54.

Having spoken to a representative of Ulster Bank, which has since taken over First Active, their representative informed me that my arrears now stand at €13,997.03. A few days later I was contacted by someone from a different office within Ulster Bank asking me if I would be interested in combining my arrears with my mortgage proper and repaying the total amount over a longer period. Is there a catch? Twelve months ago Ulster Bank wouldn't entertain the possibility of combining my arrears into my mortgage and were threatening me with the High Court. What should I do?

Frank

The problem with 30-year mortgages such as Frank's is that, even if he keeps up with the repayments, he pays off very little principal in the early years.

By my calculation, someone six years into a 30-year €250,000 mortgage would still owe more than €218,000 after six years.

In other words, even if Frank had kept his mortgage repayments up to date he would have paid off less than €32,000, about an eighth of the amount he had originally borrowed.

While I can understand the attraction to Frank of Ulster Bank's offer to consolidate his arrears into his mortgage, I would be wary.

If he accepted the bank's offer the amount outstanding on his mortgage would shoot back up to more than €232,000.

While this wouldn't reset the clock to zero, it comes pretty damned close.

So what should Frank do? My advice is to clear off the arrears if he can possibly manage it.

He has already shown an ability to knuckle down and make inroads into his arrears -- which probably explains why Ulster Bank has so dramatically changed its attitude towards him over the past 12 months.

If Frank could stick to clearing his arrears he would have paid them off in a little over two years. He could then concentrate on paying down the rest of his mortgage. If, on the other hand, he adds his arrears to his mortgage he will stretch his repayment period by at least two years.

With house prices continuing to fall, anyone with a mortgage needs to do what they can to pay it off rather than continue to have a financial millstone hanging around their necks for the next generation.

I was recently contacted by a representative of Bord Gais seeking to persuade me to switch my electricity account from the ESB to them. Is this a good idea or should I stick with the ESB?

Eve

Since launching its 'Big Switch' campaign more than a year ago, Bord Gais claims that 350,000 electricity customers have switched their business to it from the ESB. Bord Gais promises that its electricity prices will be at least 10-14pc cheaper than the ESB in the first year and 5pc after that.

So should Eve make the big switch? My advice would be to make the move for the first year and, with the ESB set to rebrand its domestic supply business shortly, wait and see what offers the ESB Mark II comes up with after that.

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