House owners urged not to extend loan term

HOMEOWNERS are being warned not to switch to interest-only mortgages, take payment breaks or extend their mortgage terms to free up cash to pay other debts.

The Debt Management Association of Ireland (DMAI) warns such moves will drive home owners into deeper debt.

The warning from Eugene McDarby, DMAI chairman, comes at a critical time for tens of thousands of homeowners who are in arrears on their mortgages and are about to be hit by budget austerity measures.

Mr McDarby, also chief executive of debt management firm Moneyvillage.ie, said consumers often “consider interest-only mortgages as a solution to free up cash to pay other debts”.

“It misleads the home owner into believing that by accepting lower repayments to free up cash that it takes the pressure off. But it doesn’t.

“In fact it means that the average mortgage holder with, say, a debt of €300,000 will be adding an estimated €17,000 over a two-year period, increasing the debt substantially.

“Equally, extending the term of the mortgage for five years could add €50,000 to the mortgage.”

Mr McDarby said it was very important to take a holistic approach to all debts. Mortgage rates are still low and may drop further this year, he said.

He urged consumers to pay as much capital as possible off their mortgage and come to an arrangement for a lower payment for credit card or credit union debt. Equally, they should request that these lenders freeze interest and charges on the unsecured debts.

“It’s about time Ireland started adopting a more responsible approach to debts,” said Mr McDarby.

“In Britain, it’s normal practice for unsecured lenders to freeze interest and charges on debts, so that payments can be made to prioritise debt. Here, there is a race on to collect debts, and whoever shouts loudest gets paid first.

“Legislation should be quickly adopted to prevent this practice.

“Debts must be prioritised based on their order of importance, and a roof over your head is the highest importance.”

Mr McDarby said lenders were giving a false sense of security. “The cash freed when people enter into an interest-only repayment scheme may result in lower monthly repayments, but the problem is that secondary debts will be prioritised at the expense of mortgage capital repayments. This is the biggest mistake a mortgage holder can make.”