Negative equity: a positive outcome

Elayne Devlin and Mike Connolly had jobs, savings and a property yet couldn’t afford to buy a suitable family home – until they managed to procure a rare ‘negative-equity mortgage’

Elayne Devlin and Mike Connolly moved back to Ireland from London in 2004, as “first time buyers”. They were planning on getting married, and had been house-hunting in Dublin for some time.

In June that year, they bought a three-bed duplex in Dublin 5 for €370,000, with the mortgage coming from one of the main national Irish banks.

They put €100,000 deposit towards it, from their combined savings over seven years, and a contribution from family

“We didn’t want to over-extend ourselves when we borrowed originally, and we didn’t want to borrow too much money,” says Devlin, sitting at the kitchen table of the house they now own in Dublin 16. “We have always been reasonably careful with money, and we save when we can.”

They married the year after buying the duplex. In November 2006, the couple saw ads run by National Irish Bank (NIB) offering a “loan-to-value mortgage”.

“If the value came in above your mortgage, you could move your mortgage to them and they’d give you a preferential rate,” she says. The duplex was valued by NIB at €510,000. “We saw buying the duplex as a good investment at the time we bought it.” They were ready to sign papers with NIB that Christmas, but due to the premature birth of their first child, they never did sign.

They soon started to think about moving from what was not a child-friendly property. The 16 steps to the front door were a daily challenge, and “there was a very large balcony with a drop at the back,” Devlin explains. When still a toddler, their child managed to climb over the railing into a neighbour’s apartment.

“There was no way to adapt the space to a growing family. You can’t extend a balcony,” Devlin points out.

Massive shock

In 2009, when Devlin was expecting their second child, they got the house valued again, with the intention of selling and moving to a house with a garden.

“We were fully aware it wasn’t worth €510,000 any more,” Devlin says. In January 2009, the property was valued at sums ranging from €395,00 to €350,000. “It was a massive shock to us,” she admits.Her husband recalls: “At that time, valuations were like pinning a tail on a donkey. There was no way of telling who was right and who was wrong.”

It went on sale for €395,000 in March 2009. There was one expression of interest, at €275,000. By November, when their second child had arrived, the price had dropped to €330,000. There were no offers.

They rented the duplex out in July 2011, found a school for their child closer to their workplaces, and rented a house on the south side of the city.

“We were both landlords and tenants,” says Connolly. “We never wanted to be landlords. We just wanted to live in a family home. We lost our mortgage interest relief. We had to pay the second home charge, and at the end of the year, had to pay tax on the rental income. We also still had to pay the property management fee on the duplex, which was €1,000 a year.”

After a year of renting themselves, with one child in school, they were anxious to try to buy a permanent family home.

“In March this year, we heard some talk of negative-equity mortgages,” she says. “We went to our bank to discuss it.”

They were asked by the bank how much negative equity they thought they were in. “We literally pulled a figure out of the sky of €30,000. That was a guess. We hadn’t had the property valued again at that point,” says Connolly.

The bank said it would look at their case, but made clear to them that their property would have to be sold before any further mortgage could be granted.

The property went on sale soon after March at €225,000. “Having to accept that our savings and help from family of €100,000 was gone west, wrecked my head,” she admits bluntly. Connolly explains: “The carrot for us in selling was that what we could afford had dropped percentage wise too. ”

Test case

They speak of how confusing the process was in progressing their negative equity mortgage with the bank.

“We seemed like a test case,” Connolly says. “The branch we were dealing with said we were their first and only case.”

They received mortgage approval of €300,000 to buy a new property, including a sum of negative equity pencilled in as €30,000, pending a sale of the D5 property. Shortly afterwards, they accepted an offer of €206,500.

“When they put in the offer, we had to go behind the scenes and see if the bank would accept it,” Devlin says. “We didn’t want the buyer to know we were awaiting approval from our bank. We were afraid it would all collapse.”

All this time, they were continuing to pay their mortgage on the Dublin 5 property, reducing the amount of negative equity every month. It had started as €30,000. By the time they found another house to buy, it had reduced to €27,700.

In the interim years, they had saved €30,000. This was to be the deposit of 10 per cent now required for a mortgage.

They found a house in Dublin 16 for sale at €298,000, with stamp duty of €2,980. With their deposit of €30,000, an additional sum reserved for fees, and the sale of the D5 house, the mortgage loan came to €269,393.

The negative equity of €27,700 became what the bank called “tranche two” of the mortgage. In all, the two collective sums loaned to them for the purchase of the D16 house was €298,000. The full loan for the house, combining the mortgage and loan for negative equity, was €297,093: the current market price of the house.

They moved into their new home less than a month ago, still not quite able to believe they had navigated their way out of negative equity. They have shared their story, because, as Connolly explains, “We’re not the only ones in this situation. For us, there was a positive outcome. Negative equity sounds impossible, but it’s about breaking something massive down into a series of small chunks as you go through the process.”

“I have a lot of friends and family who bought in the boom years and are totally caught up in negative equity situations,” Devlin says. “And most of our friends did not spend wildly. They just wanted to have a home. As we did.”

Boom, bust and bounceback: A timeline of savings and equity

June 2004

€370,000 house purchase

First-time buyers Elayne Devlin and Mike Connolly, with a joint annual income of €77,000 and no children, bought 1,150 sq ft three-bed second-hand duplex in Dublin 5. The couple’s deposit of savings and family assistance totalled €100,000. Stamp duty and solicitor’s fees came to €17,467.Their mortgage was €287,467 over a 30- year term. Monthly payments would vary between €1,060 and €1,594 .

November 2006

€140,000 increase in value

Property valued at €510,000 by National Irish Bank.

January 2009

Value drops by €115,000-plus

House valued at between €350,000 and €395,000

March 2009

House on sale at €395,000

One expression of interest at €275,000.

November 2009

Sale price drops to €330,000

No offers.

March 2012

Sale price drops to €225,000 No offers.

July 2012

Property sells for €206,500

A statement two months later stated the couple owed €234,184 including sale price, on their mortgage, leaving negative equity of €27,684.

Current status

€298,000 house purchase

In July 2012, with a joint income of €100,000 and two children, the couple bought a 1,050sq ft three-bed house in Dublin 16 for €298,000. The deposit was €30,000 ,with stamp duty costing €2,980.

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

Conor Pope

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.

Repayments

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.