Lifeline to families trapped in negative equity nightmare
Published 15/02/2012 | 05:00
HOMEOWNERS in negative equity have been given a lifeline after two banks were cleared to offer them new mortgages.
The Irish Independent has learned that major lenders Permanent TSB and Bank of Ireland have obtained permission from the Central Bank to offer a new type of home loan.
This will involve their negative-equity debt being tacked on to a mortgage for a new property, freeing them up to move.
It offers a glimmer of hope for the depressed housing market, where thousands of professional young couples are trapped in homes that are worth less than the amount they originally borrowed.
It is hoped the new scheme will allow them to think about moving, although they will carry their negative equity debt on to their new home.
However, it could help kick-start the revival of the housing market if it improves people's chances of trading up to bigger houses to start a family.
More than half of mortgage holders are stuck in some form of a negative equity nightmare, which means their lenders will not allow them to sell up and move.
Negative equity means that their property is worth less than their outstanding mortgage -- so even if they sell their homes, they will still owe money to the bank.
Many people are still earning enough that they would be able to meet payments on a new mortgage if they were allowed to transfer some of the negative equity on to a new loan.
Some would be willing to do so as they seek a larger property to accommodate a growing family, after being stuck in small apartments or starter homes for years.
Others might be looking to move for job reasons.
Although the negative-equity debt would follow them to the next mortgage, many people would be willing to take this hit in their desire to move.
Goodbody Stockbrokers economist Dermot O'Leary has estimated that more than three-in-five mortgage holders are in negative equity.
However, the scheme will be strictly limited to those who are considered able to meet the repayments.
The Central Bank initially resisted allowing the banks to offer these kind of products because of fears that if they were too readily available, it would lead to people ending up even deeper in debt.
There were also fears that if house prices kept falling then those with a negative-equity mortgage would be in an even worse financial mire.
Strict limits will be imposed on the amount of negative equity that can be carried on.
And the homeowner will need to sell their first property before they can move on to the next -- although the scheme may offer some flexibility.
Other lenders are understood to be watching closely to see how the new scheme works out.
Between them, Permanent TSB and Bank of Ireland issued about two-in-five mortgages during the boom.
The Central Bank will not yet allow the products to be made available across the board and is instead insisting that both Bank of Ireland and Permanent TSB only offer these specialised mortgages to their existing customers.
A spokeswoman for Bank of Ireland said: "Bank of Ireland confirms that in response to their mortgage customer requirements, it is supporting certain customers who wish to trade up their private residence and have residual negative equity on their existing mortgage after selling their existing home."
The spokeswoman explained that Bank of Ireland would only approve mortgages where homeowners ended up owing 25pc more than their new property was worth.
This would mean someone buying a new home for €200,000 would take €50,000 of negative equity on to the new mortgage.
A spokesman for the Central Bank said the ability to meet repayments on the new mortgage would be the key criteria.
It is understood there is limited demand for other lenders in the market to launch a negative equity product at the moment.