There are, unfortunately, a staggering number of people who feel trapped by negative equity. Negative equity, put very simply is when the value of any asset (for the purpose of this article, a house or apartment) falls below the amount of the outstanding loan on that asset. Negative equity is a relatively new phenomenon and comes about through one of two, or a combination of two reasons.
The first is when the property market takes a dip and previous values of properties become a distant memory of the glory days that went before. The second is where combined loans on a property creep up over the months and years to exceed the value of the property. This may be because the borrower takes out home-equity loans or has simply borrowed too much against the property in the first place.
The mortgage market pretty much worldwide has been criticised in retrospect for over-lending on already inflated property prices as well as sometimes lending people more than they can afford to repay. As a result, banks and bankers have taken a real hit from the long period of recession we’ve been facing for almost a decade and a half. What many of us don’t like to shout about though is that it was us who sought out and demanded those borrowings, believing that everything in the garden would remain rosy. Either way, whoever is to blame, it’s true to say that property and mortgage markets have changed over the recession period and one outcome for many is negative equity.
So, if you’re in a negative equity situation, can you still get a mortgage? That’s a very good question and the answer is “yes, but…” As you can Imagine, borrowing in a negative equity situation is a much tougher call than borrowing where there is equity in your home, you have cash in the bank and you have a secure job with plenty of income to multiply; but it is often possible. In this article, we’d like to share a scenario that will help explain how and when it might be possible, but of course, like everything financial, the response will depend on your unique circumstances.
The first thing that has to be made clear is that borrowing in a negative equity situation is only going to be possible if you have access to some cash. In effect, you need to have the equivalent of the deposit on your new home in cash to be in with a chance. So if this isn’t the case for you, then the answer
to this question is a “no”. Sorry. If you do have cash at hand that you can use as the deposit on the house you’re planning to move to, then it may well be
possible to borrow your way out of your trap.
The first option and the one which should be of most interest to holders of Tracker Mortgages is to transfer your existing mortgage over to a new property – how does this work?
1) Your house is worth €200,000.
2) You have a mortgage outstanding of €250,000.
3) You want to buy a new family home for €300,000.
4) You have a tracker mortgage of +.95% = 1% on your existing home.
5) You have (or access to) the required deposit of €30,000 for the new purchase.
Therefore:
• You sell your existing home for €200,000 which leaves you still owing the bank €50,000.
• You buy the new house for €300,000 and need a mortgage of €270,000 against this.
• Adding back the shortfall you now have a mortgage of €320,000 on your new home of which the old tracker mortgage of €250,000 (with a 1% rate increase for a number of institutions) and an additional mortgage of €70,000 at current market interest rates (circa 4.4%).
Obviously for the above scenario to work your incomes must allow you to qualify for the new complete mortgage of €320,000.
The second option, and the one we are seeing a lot of traction on is that customers are holding on to their property in negative equity as an investment property and are approaching a new institution to secure a mortgage for their new house.
This is very much dependent on the rent achievable on your existing home and your incomes as there will undoubtedly be some shortfall coming through
from the existing property.
Whilst this is very appealing it does come with some pitfalls:
1) You will have a tax liability on the rent you achieve on your now rented property.
2) If there is a period where the initial house is not rented, can your cashflow/reserves sustain this?
3) If your existing tracker lender finds out about the property being now an investment property, can they take back the tracker rate?; although there is little evidence of this, it does need to be highlighted.
Either way for any scenario it is worth meeting with a Financial Broker to go through you own circumstances and to find the best solution for you.
Author: Fran Cooke
