Blow to banks after High Court judge rules splitting mortgage debt is not sustainable

BANKS have been dealt a blow after the High Court ruled on how mortgage borrowings are to be treated in formal debt deals.

The ruling could mean banks may no longer be able to “warehouse” part of a mortgage when a formal debt deal is put in place for a homeowner.

Ms Justice Marie Baker ruled in the High Court, in an appeal case, that including a split mortgage as part of a Personal Insolvency Arrangement (PIA) was not financially sustainable.

The issue involves personal insolvency arrangements that also include split mortgages.

A PIA is the restructuring of mortgage and other debts, up to €3m, with a lower repayment made over a six-year period. Sometimes debts are written off.

Often a split mortgage, or warehousing, is agreed as part of the PIA. A split mortgage involves warehousing part of the mortgage amount, usually for more than six years.

No repayments are made on the warehoused part, with some banks charging no interest on the “parked” portion.

But barrister Keith Farry, instructed by Anthony Joyce and Co Solicitors, argued in court that under the Personal Insolvency Act a split mortgage should not be used in conjunction with a PIA.

This is because a PIA has a finite lifetime of six years, but a split mortgage could be in place for years before it is resolved.

Judge Baker agreed with an earlier circuit case finding that a split mortgage used as part of a PIA would be unsustainable. KBC Bank had appealed the circuit court ruling.

The appeal related to a married couple with three children who had a PIA proposed by McCambridge Duffy that was rejected by KBC. Debt of €250,000 was to be written off, but there would be a mortgage balance of €120,000. KBC had proposed a different PIA arrangement.

Judge Baker said this was “benevolent” but it was “capable of creating circumstances amounting to insolvency at the end of the mortgage term in approximately 23 years’ time”.

She said warehousing some of the debt, as KBC proposed, presented a hazard and was unfair to the debtor.