Negative equity mortgages – does the shoe fit?
THE ANNOUNCEMENT this week that a few of the banks will be offering negative equity mortgages to people trading up must have come as a momentary chink of light to growing families trapped in confined spaces, until, that is, they realised it doesn’t apply to them.
This product is unlikely to spark a buying frenzy of family-sized homes because although half of mortgage holders are in negative equity, the number of people who will a) get approval from the limited number of banks offering it and b) have the stomach to take on that extra debt, will be relatively small.
At this stage anyone who bought their house after 2002 with a mortgage is probably in some degree of negative equity. This mortgage product is only suited to people in a relatively small degree of negative equity who can now avail of much lower house prices. But how many of these families will actually qualify for the mortgage? The banks will be looking for a blemish-free credit record and with many families now part of the so-called squeezed middle, impacted by wage cuts, job losses, increased taxes and levies, how many will be able to show the banks prompt bill payments, a pristine credit-card statement and decent savings?
If they have all this, the banks will be then looking at how stable their employment is and it’s well known that they favour government employees and certain IT workers (Google,Ebay etc ) which narrows the field even further. Even if you’re lucky enough to be a couple working for Google with a pristine financial track record, are you going to want to land yourself in more debt for the sake of a bigger place? Say for example a couple buy a new house for €240,000 and owe €60,000 after selling your previous home. This amount would be added to the new mortgage, which would then amount to €300,000 or 25pc more than their new house is worth – in line with the new, 125pc loan-to-value limit which Bank of Ireland has outlined. They would also have to factor in stamp duty and legal fees.
A couple would qualify for tax relief at €900 per year to 2017 when the tax relief ends while a single person trading up with a €300,000 mortgage could claim €2,700 relief over the next six years if they buy before the end of this year.
For those stuck in a small apartment with small children, getting out might seem a pressing issue but as we haven’t yet reached the bottom of the market, many will want to wait to see what happens. Some might take the option of letting out their property and renting another place – although this depends on whether you can afford to cover any shortfall, if the rent doesn’t cover the mortgage.
Then there will be people with tracker mortgages who won’t want to lose them by taking the negative equity mortgage route and others might be put off by tax relief implications, depending on when they bough their property. All in all, it seems to me that this mortgage is for such a select group that the impact won’t so much be big bang as a damp squib.