Home, sweet home
The fall in house prices left many homeowners in negative equity, but this need not necessarily prevent you from trading up, says John Cradden
IT'S the topic no one wants to talk about, but this elephant has no plans to leave the room. Negative equity happens when the value of your property on the open market amounts to less than the sum of your mortgage.
If you bought a house within the past five years, you are likely to be in negative equity to some degree.
The average household is sitting on negative equity estimated at €43,000, according to Irish Independent calculations based on a recent report by Goodbody Stockbrokers.
It was estimated that 116,000 households were in negative equity at the end of 2009, rising to nearly 200,000 by the end of this year, according to the Economic and Social Research Institute.
However, this is a conservative estimate based on prices falling by 24pc from their peak in 2007. If house prices end up falling by 50pc, this figure would rise to 350,000.
It is generally expected that when the National Asset Management Agency is established and house prices start to recover, they will do so only very slowly and steadily. But this means that thousands of us may be stuck in negative equity for quite a number of years. This may not be an issue for you if you plan on staying where you are for the foreseeable future.
You may also have just enough of your mortgage paid off that it will not prevent you from trading up in the short to medium term. However, if your LTV (loan to value ratio) is still above 70pc or so, the financial challenge of trading up takes on a new dimension.
Kevin McNerney, director of the Mortgage Finance Company, says most first-time buyers borrowed between 90pc and 100pc of the purchase price.
"This leaves people in a position whereby, even if they wanted to sell the property and rent something for a few years, they would need to come up with a large lump sum to hand over to the mortgage provider, just to clear their mortgage debt." He estimates that if someone wanted to trade up, they would also have to come up with an additional lump sum ranging from 8pc to 20pc of the purchase price of the new property.
"If they buy a second-hand house they will need to have money for their stamp-duty also."
But what if you definitely need to move at some stage within the next five years? Is there anything you can do to prevent negative equity from scuppering your plans?
Depending on your circumstances, the ultimate answer may be no, but at the same time there seems to be little point in just waiting and hoping.
"If someone feels that they will need to trade up their property within the next three to five years, then the only option available really is to start putting additional money aside each month to enable them to have a lump sum set aside for when the time comes," says Mr McNerney.
For those who may need to move in three years' time, Patricia Foskin, of Waterford-based mortgage brokers Foskin Mortgage & Finance, suggests fixing mortgage rates now for the next three years. Depending on the lender, three-year fixed rates start from 3.19pc.
"This way they can avail of the current low rates for the next three years and save as much as possible by opening a regular savings account, where there are rates available of up to 4pc at the moment," she says.
Karl Deeter, operations manager at Irish Mortgage Brokers, says: "I think that it really comes down to what you can afford. If you can repay a little extra on your mortgage, now is a great time because with rates so low you will eat into capital in a more rapid fashion." For those on a cheap tracker mortgage, Mr Deeter suggests putting surplus funds into a high-interest savings account, so that you have the flexibility to decide what to do with it, whether as a down payment against another property or to pay off a lump sum on your existing mortgage.
However, he warns that whatever you do, it is vital that your credit score stays good as missing even a single mortgage payment could create more difficulties, particularly as banks become much more conservative about their lending.
"People need to find a way to avoid damage from the downturn as much as they need to find ways to get themselves lined up for any future move," he said. He also recommends overpaying your mortgage, but warns that those on fixed rates will not be allowed by their lenders to overpay, or will have to pay a penalty for doing so that will negate the overpayments in the first place.
You should also assume that property prices will not increase when determining how much you need to put by in order to clear the negative equity portion of your loan and also raise a deposit for a new property.
"This will help you to work out how much you need to be putting aside every month," says Mr McNerney.