1) Will anyone give us a mortgage, that will carry over the negative equity
2) Will we rent out our existing house and rent a new one?
3) Will we rent out our existing house and buy a new family home?
These are the questions a lot of couples are asking themselves and of course there is no right or wrong answer. But let’s look at each separately and the pro’s and con’s for them.
1) Will anyone give us a negative equity mortgage?
The answer to this is yes but unlike standard mortgages there is no set criteria and banks are assessing applications on a case by case basis. A number of institutions are apparently working on products but these were promised months ago and none have materialised. I know of two couples locally who have successfully recently achieved this.
One of them is taking out a new loan at 90% loan to value over 30 years and carrying the negative equity (circa €50k) as a separate amount which they are paying down over approx. 10 years.
The other is taking the 90% loan plus the negative equity and paying it down as one over 30 years.
The obvious advantage to this is that you have achieved your goal of moving on to a newer home at a time when house prices are lower than when you first entered the market.
The potential disadvantages are the dual loan repayment without rental income coming in from the other side and the potential loss of a tracker rate when negotiating the new loan.
Also, with repayments set to go higher in the future will you really be able to pay down the increased (or two) loan(s) in the future?
2) Will we rent out our existing home and rent a new, larger one?
This is very common and looks like the obvious choice and will definitely resolve the problem. There are a couple of things though you need to be aware of if this is your choice:
- If you have mortgage interest relief you must cancel it, as this is no longer your primary residence
- You must register with the PRTB
- You are now going to be liable for tax on the rental income from the existing property, so you should keep full files with regard to expenses and bank interest charges etc…
- Obviously, you will still have to pay the property tax and, if applicable, maintenance charges
In addition to the above a contingency budget for maintenance work should be put in place and also when working out your finances you should work off the property not been rented out for a minimum of two months in every years.
3) Will we rent out our existing and buy a new one?
A lot of clients are surprised to hear that this is an option, but it is and one that is been taken by more and more people. One working example is the following:
Client (1) – Age 35 – Basic salary €40,000
Client (2) – Age 33 – Basic salary €32,000
Family home is worth €200,000 and there is a mortgage o/s of €235,000 over 27 years at a tracker rate currently worth 1.75%. Potential rent is €1,050 per month.
Now assuming the clients have a good banking history and save a few quid every month (doesn’t have to be excessive) they would qualify for a mortgage of between €200,000 and €260,000 – and therefore be able to buy a property at a minimum of €220,000 or €287,000 (adding back the 10% deposit).
While this will sound appealing as the customer is now holding on to their existing property which will hopefully move into positive equity in the future and may now form part of their retirement strategy the same pitfalls the have been outlined in number (2) apply, with the added pressure of a new mortgage.
Options do exist and whilst these are very tempting make sure you research them thoroughly and to be prudent when doing your calculations apply only one salary as well to see how you might survive if this were to happen.