Making Cents: Your financial questions answered

Question

Liam, I’m getting divorced, and I have to buy my future ex-husband out of his portion of the house we jointly own. The figures are very tight, and I might end up being short. My retired father at the weekend brought up the idea about releasing equity from his house to help me out. I know very little about these types of schemes but instinctively they don’t sit well with me. He thinks he can release some equity out of the house, make no repayments and the payback isn’t very big, but I don’t think he’s very sure either. I’m assuming there would be an interest rate on the amount he releases. I just want to be able to give him the facts on equity release schemes like this, so he fully understands. And it’s not something that I plan to go through with, but I want to be able to show him why I don’t want him to do this for me.

Answer

You’re right, this is not a route I would encourage and I would only use it as an absolute last resort.

Let me explain to you how it works.

What happens is a person over the age of 60 can release equity from their property and can have no loan repayments. The monies will be returned when the property is inherited and eventually sold.

So, someone aged 60 could take 15% from the value of their property and let’s say the value of their property is €500,000, that means they’d get €75,000.

The interest rate charged on the loan is about 6.7% so if this person lived to the age of 70, the €75,000 they borrowed would have to be repaid back after their passing in the amount of c. €146,671.

And if they lived until 80, the €75,000 debt becomes €286,252 and if they lived until 85 the €75,000 becomes €399,863. So, it becomes a very expensive debt to be repaid from the person or persons inheriting the property. And in all likelihood the property would have to be sold to repay this debt.

So, if you and your dad can stay away from this type of loan at all I would say, do.

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Question

What is a bear trust?

Answer

It’s actually spelt bare and it’s a trust arrangement where assets are held by trustees for an individual who is known as a beneficiary. And this type of trust is most often used to gift and manage assets for minors.

And the reason why people, and most often its parents that set up these trusts for their children, is driven by tax reliefs - the first one being capital acquisition tax.

Gifts of €3,000 per parent per year do not impact the amount charged on gifts or inheritance a child receives from a parent over their lifetime and that current threshold is €400,000.

A bare trust may also be used to invest an asset in a tax efficient way especially where the value of the asset may be expected to rise in the future.

And because capital acquisition tax is charged and calculated at the inception date of the trust when the value of the asset could be lower than what it is in the future, there could be a significant saving in this instance.

And parents will typically set up a bare trust to set money aside that will be used to gift money to their child who will use it for perhaps college expenses or a deposit for a house or travel or to set up their own business and there could be many more reasons why they are setting this money aside but they are really doing it to benefit from that annual gift exemption of €3,000 because they are saving their child €990 for every €3,000 they gift them each year because that’s the amount that isn’t subject to a future inheritance tax.

A couple of final things worth noting about bare trusts and the first is that the trust will be subject to exit tax which is currently charged at a rate of 41% when the assets are transferred or disposed of. And once assets are placed into a bare trust, they cannot be reversed. What this means is if you put money into a trust for your child and you decide you want that money back in a year or two’s time, you won’t be able to get it because the assets are irrevocably your child’s once placed in the trust.

Question

Hi, I am currently beginning to save for my first mortgage and I'm not sure where to put my savings. I have some money with an Irish bank but it’s earning very little and I have more money in an online trading account. I’m not sure if I’m correct in thinking that when it comes to applying for a mortgage in the future that any Irish lender would prefer if I saved the money with them especially if I end up taking a mortgage through them. Is this correct?

Answer

Where you accumulate your savings won't matter to any bank i.e. they won't look any more favourably or less favourably on your application. What is most important to them is seeing how the funds were accumulated and providing evidence to them. So, whether you provide that through a share purchase scheme at work or through an online trading platform or into a regular savings account with any Irish bank or from a combination of everything I just referred to, it won't matter.

So, I’d say source the provider that's getting you the best return and know it won't impact a future mortgage application.

Question

Liam, I have €30,000 to invest. I won’t need it for five years and I’m looking for a good return and a guarantee of some or all of my capital. Any suggestions?

Answer

Okay the first place I looked at when I received your email was the Competition and Consumer Protection Commissions’ website (www.ccpc.ie) because they have an excellent resource where they compare what a number of different institutions are currently offering under different time periods, different amounts etc.

And what this resource was able to very quickly reveal was that PTSB were offering a fixed rate of 10.41% (2% AER) over a five year term with the capital 100% guaranteed.

So, if you invested €30,000 with them you’d earn c.€2,091 in interest after tax.

And An Post were offering a 9% tax free (1.74% AER) return over five years as well.

If you invested €30,000 with them you’d earn c.€2,700 in interest.

I next looked at the www.raisin.ie platform.

They have access to a multitude of banks in Europe and the best rate they have available over five years was with a bank from Germany i.e. Aareal Bank who are offering a gross rate of 2.75% per year (2.75% AER) which means you’d get a return from them after tax of €2,763, over five years.

And then there are other accounts that have 100% capital protection but don’t have an explicit guaranteed return.

I’m specifically thinking about two accounts I came across recently and both are made available by BCP Asset Management and the first account is called their dual index bond and it tracks (a) the S&P 500 and (b) the Euro Stoxx 50 funds.

And if both funds are above their initial index starting point at maturity the fund will return 16.25% (3.83% CAR) and it’s capping its returns to that amount.

The term is four years and based on past performance the fund has returned the full 16.25%, 73.80% of the time. And the minimum lodgement allowed to this account is €20,000.

BCP’s second account is called their Pan European Bond 7 and it tracks the STOXX Europe 600 Index.

The term for this account is five years. And 110% of the Index growth is added to the initial investment amount and the returns are capped at 38.50% (6.7% CAR).

The average return for this bond over the time period has been +22.69%. And again based on past performance the fund has returned the full 38.50%, 73.60% of the time. The minimum lodgement allowed to this account is €20,000.

This fund provides exposure across four economic areas - Eurozone, the UK, Switzerland and Scandinavia.

The 100% capital security for both accounts is provided at maturity by Goldman Sachs Group (GSG). Credit Ratings: A2 (Moody’s) / BBB+ (Standard & Poor’s) / A (Fitch).

Question

Liam, I could do with some advice on overpaying my mortgage. I received a work bonus and after tax is paid, I’ll get about €10,000. My idea was to pay €6,000 of it off my mortgage. I want to be mortgage free as fast as possible because I’d like more flexibility with my career in the future and I think having my mortgage paid off would make this more possible. I owe about €144,000 and I think I have 24 years left. My rate is a variable one at 4.75%. Any advice would be greatly appreciated.

Answer

Okay first off, if you make a lump sum lodgement against your mortgage in the amount of €6,000 the impact will be (a) the term will reduce by 1 year 9 months and (b) the interest saving will be €11,890.

So, it’s an excellent use of this money assuming you have other monies available because once it is taken off the mortgage it's gone.

And if you make an annual overpayment of €6,000 you will clear your mortgage in 12 years and save €51,561 in interest payments.

And the big advantage to doing this apart from the interest savings is being able to reduce the amount you have to earn which will give you the future flexibility with your career you were referring to. And you’re right because being mortgage free would hugely help because your current mortgage is costing you about €21,000 every year before tax and when that requirement is gone, you can choose to earn that much less or save that much more.

Liam Croke is MD of Harmonics Financial Ltd, based in Plassey. He can be contacted at liam@harmonics.ie or www.harmonics.ie