Negative equity: a positive outcome
Tranche two of the loan, €27,700, for mortgage funding, was for the outstanding negative equity on the Dublin 5 property.
The total cost of the loan for the mortgage funding the Dublin 16 property was €297,093. The term was 29 years, with a current monthly repayment of €1,486.
Negative equity: The options
While the couple in the accompanying piece feel understandably distressed at how a collapsing property market has swallowed up their €100,000, they can also count their blessings.
They are among a very small number of people who have met the strict qualifying criteria for a negative equity mortgage, and have been able to move out of a house they thought wholly unsuitable for their family and move on with their lives.
They now have a mortgage which is not much bigger than their first mortgage, taken out eight years ago, and their new house is much more suitable for their needs. And yes, they had to sell their Dublin 5 duplex for much less than they paid for it, but they have also bought a house for more than 60 per cent less than it would have cost them at the height of the boom.
There are tens of thousands of people who have not been so lucky and are still stuck in homes they no longer want to live in, with mortgages they are struggling to afford, and with no prospects of being approved for a loan. Earlier this year the Deputy Governor of the Central Bank, Matthew Elderfield, ordered banks to come up with strategies to help people in this position. Elderfield may care about people in negative equity, but he definitely cares about the market.
The negative equity trade-up mortgage this family have taken out is the first product aimed at addressing the issue in a meaningful way. AIB, EBS, Bank of Ireland and its subsidiary ICS Building Society all now offer such loans. They allow borrowers to access up to 175 per cent of what a potential new home is worth as long as they can prove, through stringent stress testing, that they can make future repayments. The banks do not just establish repayment capacity based on today’s interest rates – they also see if borrowers could handle a 2 per cent rate hike. If the answer is no, their answer will be no.
Banks will not let people borrow more than 92 per cent of the price of the new property and have set a borrowing ceiling of €700,000 – a figure which includes the chunk of negative equity. Banks won’t take any hit on homes they financed during the boom; the burden of debt is carried entirely by the borrower.
Another difficulty is that anyone taking out such a home loan will lose their tracker mortgage. This means the new debt will not only be larger, it will also have an interest rate which could be as much as three times higher than the old one.
A negative equity trade-down is also proposed. If you have a €400,000 mortgage on a house now worth €300,000, you could sell it at that price and buy another property at €200,000. You would carry the €100,000 in negative equity to the new property, bringing the loan burden down to €300,000, although the new home would be smaller or in a less desirable area.
Short-selling is another option on the table. This would see banks give homeowners permission to sell a property in negative equity. They would not, however, be able to walk away from the debt, which would be converted into a personal loan. This would at least allow people to leave a home they have been stuck with, but the residual debt would be difficult for many to stomach.