Hope for a bigger home restricted to those in good jobs
Published 15/02/2012 | 05:00
THE Central Bank is allowing new mortgage products where people will get to move house even though their existing property is worth less than they owe.
The scheme is only being offered to customers of Bank of Ireland and Permanent TSB at the moment.
One finance expert explained that the scheme might help a family who originally borrowed €300,000 during the housing boom years. The housing bubble was at its most inflated between 2004 and 2008.
The couple in this example has managed to pay off €90,000 on the original mortgage. They have done this through a combination of meeting the monthly repayments and by using a small inheritance. They now owe €210,000 to the bank.
But the severe collapse in property prices means their house may now only be worth €150,000.
This means the household would be €60,000 in negative equity. In other words, if they sell today they will still owe the bank more money than they get from the sale.
If this family needed to move to a larger home because there were now more children, they may be able to buy a new house for €240,000. They would also take the €60,000 amount they owe the bank and tack it on to the new mortgage. Their overall mortgage borrowing would be €300,000.
This would mean they would owe 25pc more than their new home was worth.
This means their loan-to-value would be 125pc. This is the most that would be allowed by Bank of Ireland under the new scheme.
This instantly puts them back into negative equity but at least they have a property they are satisfied with -- and the housing market has been given a small boost with two sales.
Experts warned because of the debt risk, the new negative equity mortgages would be restricted to those in good jobs, who have demonstrated a good repayment capacity.
Lenders approving such a deal would need to be convinced that those taking it up would be well able to handle the repayments on the new, higher home loan.