Property: stuck in a trap
A massive number of people have fallen into negative equity, and now the figure may have risen to 340,000. But worried homeowners still have options, writes John Cradden
IT IS not a particularly popular topic of conversation, but the issue of negative equity is now of major concern to many homeowners because of the continuing sharp fall in property values.
Negative equity happens when the value of your property on the open market amounts to less than the sum of your mortgage.
According to the Permanent TSB house price index, the average price paid for a home nationally in March 2009 was €253,546, compared with €261,573 in December 2008 and a peak of €311,078 in March 2007.
Towards the end of last year, Friends First economist Jim Power said that he estimated about 200,000 people would be in negative equity by the end of 2009. But given the continuing falls in property prices since the start of this year, Mr Power recently estimated that figure had grown to around 225,000 people, and that by the end of the year as many as 250,000 homeowners could find themselves in negative equity.
However, the latest research reveals this could now be as high as 340,000.
Say you took out a 90pc mortgage of €270,000 to buy a house for €300,000 three years ago, and to date you have paid off €20,000 on the loan, so your balance is now €250,000. If that house is now worth €240,000, that means you would be in negative equity to the tune of €10,000.
If you took out a 100pc mortgage for €300,000 for the same property, and paid off €20,000 in three years, your balance would be €280,000, meaning you would be €40,000 in negative equity.
"Anybody who bought into the market between 2005 and 2006 at a loan to value (LTV) of 70pc or higher, would now be in negative equity," said Mr Power.
So what are the practical implications of being in negative equity?
"It affects anyone who wants to trade up homes or switch lenders, as it renders these tasks difficult, if not impossible," says Liam Ferguson of financial advisers Ferguson and Associates.
"Such people will have to wait until they have paid their mortgage down well below the value of the property, or the property value has risen again, which may take a long time, or both."
However, it is less of an issue for those planning on staying where they are. "If you like where you live and can afford your monthly repayments, negative equity has no real impact on you," says Mr Ferguson.
"Affordability is the most critical issue and since interest rates have fallen considerably, most of this group will be able to maintain their mortgage repayments and remain in their homes until the market recovers," says Kevin Johnston, head of the Credit Union Development Association.
Sitting it out until the market recovers is one thing, but if you are stuck on a high fixed-rate or uncompetitive mortgage, are you really trapped with your current lender?
"Basically yes, because you are caught twice," says Karl Deeter, operations manager with Irish Mortgage Brokers.
"On one hand, no bank wants negative equity on their books, so they'd be glad to see your loan go somewhere else, but another bank won't offer a new facility unless you have the required loan-to-value they are lending at, and therefore you'd need a big lump of cash to move."
What sort of cash would you need to free yourself of this trap?
Take an example of a couple that bought their house on a 100pc mortgage of €300,000 three years ago and have paid off €30,000 so that their balance is now €270,000, but their house is now worth €250,000.
Mr Deeter says that because 100pc mortgages don't exist anymore, the couple would need to effectively raise a 10pc "deposit" on €250,000, which would be €25,000, and would also have to clear the negative equity of €20,000.
"There are not many people who have €45,000 lying around, so for the majority of borrowers, they are stuck with whatever deal they have, even if it is uncompetitive."
What if you have a growing family and really need to move to a bigger house, or need to relocate for work? If you are in negative equity, you may not be able to sell, even if you wanted to and could find a buyer.
"If the difference between what you owe and the sale proceeds is relatively modest, the lender may extend you an unsecured loan to help complete the sale," says Mr Ferguson. "But the repayments on such a loan will have a negative impact on the size of mortgage you will qualify for on your next home."
Indeed, it may be better to rent out your home and rent somewhere else.
"You don't get underwritten to rent, so it is really one of the few ways to get mobility into housing without having to finance the deal," says Mr Deeter.
Banks can, in theory, prevent you from selling your house, but they are not deliberately out to alienate customers, says Mr Johnston.
"As a result, banks are becoming increasingly flexible and will work with customers, particularly if they are actively trying to solve or improve their financial situation."