Broker to introduce 'negative equity protection'
Published 08/09/2011 | 05:00
A FINANCIAL services company is attempting to kick-start the mortgage market by being the first to offer home buyers protection against negative equity.
Today, IFG Financial Services is set to announce a bond that banks and developers will be able to offer to buyers that will "insure" them against negative equity, the Irish Independent understands.
Negative equity occurs when the amount owed on a mortgage is greater than the property's value. The new "valuation bond" would protect borrowers from a drop of up to 20pc in the value of the property.
State property management agency NAMA is planning to introduce a similar scheme but only for those buying residential properties that it holds in its portfolio.
It is understood that the idea for a negative equity protector was first suggested by IFG to executives in NAMA.
The IFG valuation bond would be paid for by banks or developers and offered as part of a sale/mortgage offering in a bid to shake up the moribund housing market.
Someone buying a €200,000 home would provide a deposit of €20,000, as normal.
A bank would provide a mortgage for €180,000. But €40,000 of the purchase price would be put into a bond and then placed in a trust fund.
The buyer would make repayments on the €180,000 amount.
After five years, the property price would be valued independently. If it had increased, then the buyer would continue to make repayments in the normal fashion.
But if the property had fallen in value then the money in the trust fund bond would be called in, and up to €40,000 would be written off. Repayments would then be recalculated to reflect a lower mortgage amount.
If the value of the property fell by less than 20pc then only a portion of the bond would be called in and written off the mortgage. The cost of providing the negative equity bond would be either absorbed by the bank providing the mortgage or the developer selling the property.
If the bank was providing the bond, the mortgage cost would be likely to reflect this by being slightly more expensive than a home loan with no negative equity protector.
But if the bond was being provided by developers, they would likely be prepared to absorb the cost in a bid to get properties selling.
Mortgage lending levels are on course to hit 40-year lows this year.