The Irish Time answers your questions on personal finance. This week a guide to mortgages.
Interest-only mortgages
There have been some advertisements lately for interest-only mortgages (not endowment mortgages) where you only pay the interest for the first 10 years, and then revert to a normal repayment mortgage or sell the house. This sounds like a very attractive option for someone trying to meet monthly repayments. What are the catches with this type of mortgage?
Mr I.H., Meath
Interest only mortgages are an increasingly popular method of financing the purchase of investment properties. It makes a lot of sense in such circumstances as there is no real imperative to pay down the capital sum borrowed. That capital sum will be recouped upon the sale of the property - in a much shorter timeframe than your average home mortgage.
On home mortgages in Ireland, interest only mortgages are not yet common although, with the steady stream of new mortgage products hitting what is a very competitive market, there is no doubt that their availability will probably grow.
For now, Rea Mortgage Services tell me that only Bank of Scotland offers the option of an interest only mortgage over the life of the mortgage. IIB Bank offers a similar facility over the early years of a mortgage before switching to more traditional options.
To some degree, EBS's contentious Family First contains an interest only element insofar as the parental borrowing can be treated on an interest only basis for the first three years before moving to repayment options.
The major attraction on interest only mortgages for hard-pressed househunters in Ireland is that the initial repayments are lower than they would be under a traditional repayment mortgage - put simply, you can afford to buy a more expensive house than otherwise. With house prices in Ireland rising all the time, this gives some hope to homebuyers although there is an argument that products like this are only serving to fuel the house price spiral for the benefit of the financial institutions and the estate agents.
The downside is that when the interest only period ends, you are faced with higher payments than would have been the case had you made repayments on both interest and capital from the outset. In the case of full interest only mortgages, you are facing a major bill for the capital cost of the house at the end of the period.
A further downside is that, if house prices stagnate, you are quickly stuck with negative equity.
Scottish Provident
When Scottish Provident changed from a mutual to a PLC, I received a cash distribution. Is it liable to tax (Income Tax or Capital Gains Tax)?
Mr D.K., e-mail
Scottish Provident changed status from a mutual to a listed company just ahead of its acquisition by Abbey National last year. At the time, Irish members - of whom there were about 75,600 - were able to choose payment options. They could receive their money either in cash or by way of loan notes.
The amount was not insignificant. The minimum amount was £500 sterling but the average payout to Irish members, who comprised about 17 per cent of the society, was £4,400 sterling, which was worth just over €7,100 at the prevailing interest rates.
Whether one chose cash or loan notes, the relevant tax liability, according to the Revenue Commissioners, was capital gains tax. If you took the payment in cash, you paid capital gains tax upfront at a rate of 20 per cent on the whole sum less your annual capital gains tax exemption of €1,270.
If, however, you took loan notes, you could manage these in such a way as to pay no tax. Essentially, you could redeem a portion of the notes each year, ensuring that the sum realised falls below your annual exemption limit in every case.
This option is no longer available following the most recent Budget in which the Minister for Finance Mr McCreevy ended the practice of deferred capital gains on loan notes. However, it is not retrospective and those people who received loan notes in the Scots Prov deal can still redeem them on an annual basis as they choose.
Buying a second property
I am interested in the financial implications of purchasing another property. I currently own a property with a value of about €250,000. My mortgage was for £110,000 taken out in March 2000. The purchase price was £131,000. Given the increase in capital, I wish to use this as collateral to repurchase.
How much would I be able to borrow? What are the tax implications involved with the move if I was to sell in future years? If I rented one property, how much tax does one pay? Are there any extra fees to be paid? Can life assurance and insurance on properties be amalgamated?
Mr P.B., Dublin
You are certainly not alone in looking to make use of the capital built up in your home given the remarkable rise in property values in recent years. So common are such moves now, that most bank and building society branches would have all the information you need at the tips of their fingers - although how much is available would vary from one provider to another.
The maximum you could expect to get would be 90 per cent of the value of your current property - provided that your income level was seen as sufficient to service a loan of that size.
With a property worth around €250,000, you would be looking at a total mortgage exposure of €225,000. You already have a £110,000 mortgage, which translates to a euro debt of almost €140,000. Of course, this is now nearly three years old but the capital sum owing is unlikely to have dropped much in that time.
On that basis, you would be looking at a maximum mortgage of €85,000 on the back of the current property, which is unlikely to be enough to purchase an additional property unless you have other resources to draw on.
It is worth noting that, if you can get someone to offer you a mortgage of sufficient size, you would probably be looking at an interest only mortgage on the second property, which would lower the repayment costs somewhat.
In terms of the tax implications, you will be liable to capital gains tax on any gain in the value of the property between the time you buy it and the time it is sold. Following the last Budget, you will not even be able to index the price at which it is bought to take account of the way inflation eats into the investment over time.
If you rent the property, you will be liable to income tax on rental income, once expenses associated with renting out the property are stripped out.
Extra fees in the purchase of a second property would include legal fees and estate agency costs, obviously. However, you will almost certainly be forced to move your existing mortgage to whatever lender provides the loan for the new property, as both will be secured on your own family home. This could involve its own costs. On the plus side, in such a case, you would not require mortgage protection as your existing home is covering the financial exposure of the institution.
On the subject of insurance, I imagine you can amalgamate life insurance but probably not building and contents cover, although you can certainly use the same provider for each property.
Please send your queries to Dominic Coyle, Q&A, The Irish Times, D'Olier Street, Dublin 2 or e-mail to dcoyle@irish-times.ie. This column is a reader service and is not intended to replace professional advice. Due to the volume of mail, there may be a delay in answering queries. All suitable queries will be answered through the columns of the newspaper. No personal correspondence will be entered into.
