Charlie Weston: Mortgage bid to unlock market could backfire
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NEGATIVE equity is the scourge of homeowners who bought their houses in the past few years.
By the end of this year, as many as one-in-three mortgage holders are expected to be in negative equity -- where the value of their home has collapsed to such an extent that they owe their lender more than it is worth.
Economic and Social Research Institute (ESRI) economist David Duffy made the estimate based on house prices having fallen by 30pc from the peak of the housing boom in 2007.
But most commentators say that house prices have fallen by around 50pc from the peak. In that case, the ESRI estimates that some 350,000 homeowners will end up in negative equity this year.
Being in negative equity means you cannot sell your house to move somewhere else. This is because you will still owe the bank more than the sale price of the home. Banks will not normally allow you to sell up in that situation.
This is why Ulster Bank and EBS Building Society are already offering limited negative-equity mortgages to their existing customers.
Now Bank of Ireland, Irish Nationwide Building Society and Permanent TSB are working on introducing their own negative-equity mortgages.
The idea is that these mortgages will allow those who have to move house to take the negative equity portion of the original mortgage on to a new mortgage when they move.
For instance, if someone originally borrowed €300,000 but their house is now only worth €250,000, they would be €50,000 in negative equity.
If this person needed to move to another part of the country for a job, or simply wanted to move home, they might be able to buy a new house for €250,000.
Their overall borrowing would still be €300,000 -- with their €50,000 negative equity ported over to the new load.
Dangers
But the lenders insist that such products will be limited to homeowners who genuinely need to move house and have the ability to repay the new mortgage.
However, the potential of negative-equity mortgages to blow up in our faces is huge. What happens if house prices keep falling? And who is to say that they won't?
Further property prices falls would mean that those availing of a negative-equity mortgage would end up even deeper in debt.
In such a situation, the borrower could be retired before they clear the new mortgage, assuming that they do not lose their jobs.
And any attempt by lenders to top up the existing mortgage would only add to heavily indebted homeowners' problems. That will have to be resisted.
That is why the introduction of negative-equity mortgages is being closely monitored by Financial Regulator Matthew Elderfield and his staff.
The last thing the regulator or the taxpayer, who has so generously bailed out our foolish lenders, wants is to re-heat the burnt-out embers of the housing market.
Especially when we still do not know the full cost of sorting out our building bonfire.
- Charlie Weston
Irish Independent
