'Trapped' homeowners warned about risks of trade-up mortgages
Published 26/09/2012 | 05:00
HOMEOWNERS trapped in properties worth less than they paid for them have been warned that new mortgages introduced to help them move to a larger home are fraught with danger.
The warning came as former building society EBS said it would offer homeowners who owe more than their home is worth the option of trading up to a larger house.
The move will mean people with so-called negative equity will be able to sell their current property and take some of the money owed to the bank and add it on to the mortgage for the new property.
EBS is the latest lender to provide what it is calling a negative-equity, trade-up mortgage.
Other lenders now offering this include AIB, Permanent TSB, Bank of Ireland. Ulster Bank said it was considering introducing the product.
The value of the new mortgage cannot exceed 175pc of the value of the new home under the EBS rules. And the deal will only be offered to residential homeowners, but this includes apartment owners.
But spokesman for the Independent Mortgage Advisers Federation Michael Dowling said negative-equity mortgages would only work if house prices started rising again.
Prices are down 50pc on average from the peak of the boom in 2007.
Most commentators feel that prices have begun to stabilise in urban areas, but they may not rise for a number of years.
If property prices do not rise, people who load borrowings from an original mortgage on to a new one would end up deeper in debt and further in negative equity, Mr Dowling said.
"Property prices are unlikely to rise in the short-to-medium term," he said. "So people taking on a negative-equity mortgage need to make sure the property they are buying is set at the right price."
Half of the 764,138 households who have a mortgage are estimated to be in negative equity.
Thousands of people bought small apartments in particular at the height of the boom but now want to move to start a family.
The product has been introduced in response to requests from EBS customers who are looking for a solution to help those with growing families, whose home is too small, the EBS said.
The lender said people who have a valuable tracker mortgage will keep that for the residual debt they owe from the first mortgage, but the new borrowings will be on a variable rate.
EBS head of mortgages Owen Purcell said: "Many customers who bought their homes in the boom years are now in negative equity. A proportion of these customers find they are in a position where they require a bigger home and can afford to service a larger loan."
However, it is understood lenders are being highly restrictive about these loans.
Mr Dowling said borrowers were being stress-tested at a very high level.
This involved only approving negative-equity mortgages if the borrowers can cope with mortgage rates going to 6pc or 6.5pc, he said.