Check out tax traps in negative equity deal
Published 17/02/2012 | 05:00
It's good news that some couples trapped in heavily mortgaged homes will be allowed to trade up to houses that can accommodate growing families.
However, such people in negative equity need to weigh up other factors including the possible loss or gain of mortgage tax relief.
The example has been given of someone who originally borrowed €300,000 and subsequently got married. With both partners contributing towards paying down the mortgage, they paid off €90,000 on the original loan.
Nevertheless, they still owe €210,000 for a flat that is now worth only €150,000. This means they are €60,000 in negative equity. So even if they sell for €150,000 they will still owe €60,000 on the old mortgage.
Nevertheless, the bank may still approve them for a new mortgage to buy a family house for €240,000.
So the €60,000 they owe the bank would be added to the new mortgage, which would then amount to €300,000 or 25pc more than their new house is worth.
That would be in line with the new, 125pc loan-to-value limit which Bank of Ireland is setting for such mortgages.
With a €300,000 mortgage, such a couple would also qualify for tax relief at €900 per year or €5,400 over the the six years to 2017 when the tax relief ends.
A single person trading up with a €300,000 mortgage could claim €2,700 tax relief over the next six years if they buy before the end of this year.
Of course such buyers would also need to budget for costs such as stamp duty and legal fees.
For any existing home owners who trade up or down before the end of the year, they can get 15pc of the mortgage interest bill back from the taxman - amounting to up to €36,000 for a couple over the first six years of a new mortgage.
That is especially beneficial to those who are in negative equity and who bought before 2004. Such people lost out in the recent Budget tax relief for those in negative equity who bought between 2004 and 2008.
But the 2004 -2008 mortgage holders could lose out on this extra mortgage tax relief if they trade up. Instead of being able to claim relief at rates of between 30 and 22pc over the six years, their tax relief rate would drop to only 15pc.
However if they delay trading up until 2013 then they would lose out on any mortgage interest tax relief. They also need to consider the extra costs involved in moving from a tracker to a fixed or variable rate mortgage.
Like anyone seeking a mortgage, couples in negative equity need to prepare well in advance. Not alone will they have to persuade their banks that they can afford to pay the increased mortgage but they will also have to sell their existing house before they move on.
That can take months -- unless they are able to take a severe haircut and spend money on marketing the property in order to achieve a quick sale.
One option is to go the auction route for a quick sale but they might get a better price with a private treaty sale, which gives a prospective buyer of their home more time to line up a mortgage. A private treaty sale can sometimes add 10pc to the price.
So they need to consider how quickly they wish to sell and in particular whether the extra mortgage interest relief is vital towards the affordability of the move.
So far, only customers of Bank of Ireland and Permanent TSB are expected to get approval for the new negative equity-type mortgages.
Banks will restrict these loans to buyers who can demonstrate good track records for making regular repayments and have a good credit record with their credit cards, etc.
Homeowners who may be tempted to take voluntary redundancy in order to use a lump sum to pay down mortgages should be wary. Even if they move into a new job fairly quickly they may not have sufficient time served in the new job to satisfy the banks of the their job security.
Buyers also need to check out all these with a mortgage broker and the Revenue Commissioners before making any moves. In particular they need to get advice before selling their existing home in a market where future local price and rental trends may differ from national trends.