There is a story in the Irish Times today about a couple who are going to lose three buy to let houses to Pepper Finance even though they repaid €950,000 of an initial €1.12 million loan.
The judge said he had sympathy for them but was obliged to decide his cases on the law, not sympathy.
The problem for the couple, and for anyone who borrows money from a bank, is that the bank must be paid interest, too. That is how the banking system works.
At the outset the loan offer letter in 2007 stated that they were borrowing €1.127 million but the total amount repayable on the loan facility was €2.252 million. The different between these two figures gives you the cost of credit, or interest, which amounted to €1.125 million.
Thus, the amount paid back by the couple may have been €950,000 but the remaining balance still stood at €1.4 million, and Pepper Finance were granted an order for the sale of the properties.
The simple mathematics of applying an interest rate of 5.41% to a loan facility over a term of 30 years means the borrower will pay back a multiple of the original amount borrowed.
There were many factors as to why the couple was unable to meet the repayments as they fell due. These factors included rent freeze restrictions, covid 19, the 2007/2008 property crash, loss of employment.
This type of story will be a familiar one to anyone who has borrowed money from a lender and has struggled valiantly to make the payments and have, in fact, paid back the original capital sum.
But paying back the original capital sum is not enough. In our banking system banks make their money from charging interest on money lent at a higher rate than they pay depositors. This difference, or margin, allows them to continue taking in deposits and lending money.