Negative equity loans -- the rise of the 175% mortgage
Many homeowners in negative equity are so desperate they'll clutch at any straws. Buyer beware.
With the collapse of the property market people don't have the option of selling and moving on -- the sale proceeds would never clear their mortgage.
However new mortgage products (now being offered by four lenders) seem at first glance to offer homeowners in negative equity a chance to move on. But maybe these products shouldn't be clutched at too eagerly -- if at all.
Negative equity mortgages let you sell your home and carry over whatever debt is left on a previous mortgage onto a new loan.
Recently AIB and the EBS became the latest lenders to offer negative equity mortgages. Up until then, Bank of Ireland and its subsidiary ICS Building Society were the only lenders offering the loans.
KBC Bank doesn't yet offer negative equity mortgages. However, "the bank is examining the possibility of introducing a mortgage which would be aimed at customers in negative equity," as part of its plan for dealing with those in mortgage arrears, according to a spokesman. Ulster Bank doesn't offer the mortgages either but "is keeping this under review". Although National Irish Bank doesn't offer negative equity mortgages, it intends to by the end of the year.
Permanent TSB only offers negative equity mortgages "in exceptional circumstances", according to a spokeswoman. "Permanent TSB has advanced a small handful of negative equity mortgages to customers who are considering trading down," added the spokeswoman. "The bank is considering whether to make a negative equity mortgage available to other customers."
With Bank of Ireland, ICS, AIB and EBS, you can borrow up to 175 per cent of what your new home is worth -- but a good chunk of that is the negative equity you'll carry over. You can't borrow more than 90 per cent of the price of the new property with BoI and ICS, and the most you can borrow, including the negative equity carried over, is €550,000. You must have a mortgage with BoI for at least two years "with a satisfactory track record" to qualify.
With AIB and EBS, you can borrow up to 92 per cent of the value of the new property -- and the most you can borrow, including negative equity, is €700,000. If the mortgage for your new property is more than €400,000, you can only borrow up to 85 per cent of the property price -- if the mortgage is for a one-bed apartment, you can only borrow three-quarters of the property price.
Such mortgages might be music to the ears of an owner who bought an apartment during the boom -- and who has had children since.
Taking on a mortgage equivalent to 175 per cent of what your property is worth however could be one hell of a noose around your neck -- unless property prices explode over the next few years.
"If people think 100 per cent mortgages were a bad idea, I can't grasp how a 175 per cent one is a good idea," says Karl Deeter, compliance manager with Irish Mortgage Brokers.
Negative equity mortgages allow banks to avoid taking any hit from a property they have financed the purchase of which has since collapsed in value, according to Michael Dowling, of the Independent Mortgage Advisers' Federation.
"When you take on a negative equity mortgage, you are paying for the loss the bank has on its own books," says Dowling. "Is it right that people should take on the negative equity that has built up on their home? Negative equity mortgages mean the bank gets its money back for a property. Some argue that the banks should take some kind of a hit."
Another drawback of negative equity mortgages is that you will lose any tracker mortgage you had on your previous home. This means that you will not only be taking on a larger debt, but a more expensive one. The mortgage interest rates available today could be as much as three times as expensive as a tracker rate.
Dowling believes that only a tiny portion of homeowners will qualify for negative equity mortgages. The high level of debt carried over means anyone applying will need a high income to qualify. Banks are also stress testing mortgages to ensure you could afford the repayments were interest rates to hit 6 or 6.5 per cent.
If you are in mortgage arrears or having difficulty meeting the repayments on your current mortgage, you're unlikely to get a negative equity mortgage.
Even if you do qualify, you might be better off financially if you pursued a different path.
Dowling believes it could make more sense for a homeowner in negative equity to sell their home -- and rent, rather than buy.
"If you sell your home and the sale doesn't clear your mortgage, you may be able to come to an arrangement with your bank to write down the outstanding debt," says Dowling. "Homeowners in negative equity need to do their numbers before taking on a negative equity mortgage. Instead of buying a new home with a negative equity mortgage, they may be better off selling their home, dealing with any negative equity left over from a house sale as an unsecured loan -- and renting another property as the family home."
If you are in negative equity and likely to be left with a substantial balance on your mortgage after selling your home, your bank may not allow you to sell it, particularly if you're planning to rent another home rather than take up a negative equity mortgage.
However, if you're having difficulties repaying your mortgage, and the bank allows you to sell your home, you may be able to come to a personal insolvency arrangement with your bank for any loan left outstanding. Under the Personal Insolvency Bill you can cut a deal with your bank to repay unsecured debt of up to €3m over six years.
Another option is to rent out your home to tenants rather than sell it -- and then rent another property as the family home.
Sunday Indo Business