How we turned our homes into boom-time ATMs to withdraw €30bn in equity
Published 29/01/2013 | 05:00
HOMEOWNERS withdrew almost €30bn in equity from their homes during the boom – as they used their properties as ATMs to provide themselves with cash.
The money was used to fund lifestyle purchases such as 4X4 vehicles, investment properties, holiday homes and paying down debt.
The sheer scale of the money taken out in top-up mortgages and by borrowing more than needed when moving house was unprecedented, a Central Bank study has found.
A total of €29.8bn was taken out in equity releases by homeowners between the start of 2002 and the first quarter of 2009.
Homeowner equity withdrawal is common in economies that experience sharp rises in house prices, the study by Reamonn Lydon and Bridin O'Leary found.
Surging house prices between 2002 and 2007 meant that large numbers of people took out a top-up mortgage on their home.
And those who were selling up but not buying a new home ended up with "substantial equity" when they sold.
The study also found that people taking out mortgages during the boom put less equity into their homes. This was because banks and building societies required a deposit of 40pc back in early 2000 – meaning the mortgage could only be 60pc of the property's value. But they went to offering 100pc mortgages during the property bubble.
People also found it easier to borrow when banks started offering interest-only mortgages and mortgages over 30 years and longer, instead of 20 years.
However, the collapse in house prices has led to homeowners paying off mortgage debt rather than top up their home loans.
"The dramatic collapse in the Irish property market means that all of these factors have been reversed, moving the household sector from one of net equity withdrawal to net equity injection," the Central Bank said.
Homeowners are now paying off their mortgages, and not borrowing, because almost half of mortgage accounts are in negative equity – where the value of the mortgage is greater than the value of the home secured on it.
There is also a reduction in the number of mortgage transactions, a tightening of credit conditions and the reduction by households of their financial liabilities.
From the late-1970s to the early-2000s, homeowners for the most part paid down mortgage debt. However, from 2002, this country experienced one of the biggest housing bubbles in any western economy. But, since 2008, there has been a 50pc fall in house prices.
The Central Bank noted that over the past five years homeowners have reverted to paying down debt, including mortgage debt.