Negative equity mortgages – a good or bad idea?

Negative equity mortgages – a good or bad idea?

Would you risk taking on a negative equity mortgage?

This week the Central Bank cleared the way for two of the state’s largest lenders – Bank of Ireland and Permanent TSB – to offer new mortgages to homeowners stuck in negative equity.

The new loans, which have been dubbed negative equity mortgages, will see negative equity debt being added onto a mortgage for a new property, freeing homeowners up to move.

Just how effective will the new mortgages be though?

In theory, the idea sounds good. With an estimated 60% of mortgages in Ireland said to be in negative equity, many people are trapped in homes that are no longer suitable for their needs.

Younger people require bigger homes to start a family, older people wish to downsize and there are many more of all ages who wish to move closer to their jobs.

At present these people are trapped and the fact they are stuck in homes with massive negative equity mortgages is definitely a factor in the property market’s demise, even if it isn’t the biggest.

However, when you scratch beyond the surface, the negative equity mortgages may not be all they are cracked up to be.

Strict limits will be imposed on the amount of negative equity that can be carried over to a new property with some reports suggesting that the maximum amount of debt a borrower will be able to carry over to a new property would be €50,000. At best, Bank of Ireland have said they will only approve mortgages where homeowners end up owing 25% more than their new property was worth.

This would rule a massive amount of those in negative equity out of taking such a mortgage straight away with the biggest factor being how willing the banks are to lend to people who already owe them significant sums of money. 

The fact that stringent testing will be required to determine if you can meet the new repayments means that many people, even those with good jobs, are unlikely to be deemed eligible.

Of course, the Central Bank are right in not allowing those in debt to slip further into it but in order for such a scheme to work it has to be open to more than just a small percentage.

To top matters off, anyone who has a tracker mortgage would have to relinquish in order to take on a negative equity mortgage. This would mean that homeowners could lose out on thousands and would be a significant financial risk given the current state of the economy.

Yes, negative equity mortgages are sound in theory but will they work in practice? The answer, unfortunately, is unlikely.

Let us know what you think though…

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There are 15 comments for this article
  1. Pingback: Three quarters of people do not believe negative equity mortgages will work – MyHome.ie Blog
  2. Arif Al-Qattan at 4:58 am

    Let’s not think one solution fits all. There might be other solutions.

  3. billy hughes at 3:12 pm

    i have a mortgage with ibrc which used to be the irish nationwide what i would like to know is how come my interest rate is 4.1500 percent and i have seen other people s comments on this site saying that their rate was as low as 1.5 percent am i being ripped off ??

  4. John at 1:35 pm

    Not everyone is on a tracker mortgage (I wish!). If this gives us the opportunity to move house while still in negative equity then I’m all for it (because we have no chance at the moment but are in a house that is too small).

  5. John at 11:58 am

    Banks should write off 50%of all mortages in ireland, because they got it wrong, if they do not do this the economy will only get worse and they will not get the money anyway.They are only trying bully people into moving from tracker loans.If you can not pay your mortage because you lost your job and can not get a jobs with the same wage to sevice the loan then thats telling the bank the lones where over valued in the first place.

  6. Mark at 11:32 am

    As well as loosing your tracker rate you are ‘realising’ a loss now. House prices will eventually recover somewhat in the next 30 years, if only through inflation, so why realise this loss now – this is no good for anyone? If you are going to carry the mortgage loss forward then why not carry the asset too and have some chance of the loss reducing through an increase in house prices?

    There needs to be some creative thinking e.g. allow people to convert their existing homes (one bed apartments etc.) into pension assets, whereby they rent out the existing home, the rent goes directly to pay down the mortgage, you may have to fund a shortfall but the goverment should chip in with some pension tax deductions. This will give people in the private sector under forty some chance to have a pension (obviously not a worry for public sector employees). This will then give (some) people the chance to leave unsuitable homes and move on with their lives and then rent or maybe buy a more suitable family home. Such a scheme could even increase the supply of decent rented accommodation and even reduce rents!! This may only help some people but worth a thought?

  7. Frank at 10:50 am

    Sound like a fantastic deal…….for the bank

    * They get your tracker

    * You owe them more money at the end of the day

    * They can get the media off their back
    claiming that they are lending the bail out
    money to the public.

    How about this instead:

    Where the neg equity is above €25K they change the existing mortgage to interest free. Then offer a 2nd mortage at a variable rate.

    This way:

    * The banks will get their original capital investment back.

    * The property market will exit the doldrums as buyers re-enter the market – the construction industry will start to build ….. etc etc etc

    * They will have used the bail out money to get the economy moving, which is why they got it in the first place!!!!

    Much fairer for all I think!

  8. Caitriona at 10:45 am

    If central bank genuinely wanted to help us,they would, at the very least, propose that we pay off the negative equity as a separate loan at the rate of our tracker mortgaes,& we would then acquire mortgage for our trade up home as a new mortgage entirely.

  9. Paul at 10:45 am

    To the 59% who would consider giving up their trackers please seek professional advice as this is yet another cynical step by the banks (central and commercial) to trick the ordinary person out of the only leverage they have with these unscrupulous gangstas.
    At some stage they will have to share the pain as they were one of the main stakeholders (experts in their field!!! with a duty of care responsibility) in creating the dire situations people are now in.
    It is laughable to read the strict conditions of this type of mortgage as the banks have not been in the business of mortgage lending for years.
    The other nasty move they are making at the moment is to persuade the Government to allow them more access to their clients financial status even if the client is not in arrears so that they are always ready to pounce should that clients circumstance change and to calculate how far they can screw the existing clients who are in arrears. Karl you could survey this move next week.

  10. Charles at 10:44 am

    Negative equity loans are just a way of landing more people in bigger trouble and ousting them out of their tracker mortgages. Banking is still a blood sport.

  11. Narbara Seligman at 10:42 am

    As usual this is badly thought out, It doesn’t make any sense.

  12. Neville mc carthy at 10:27 am

    I dont trust the banks as far as I can throw them,they want people to give up trackers so they can enter into to more debt.nothing but a smoke screen for banks to make more money

  13. yvonne lyons at 10:20 am

    ,

  14. Billy Middleton at 10:15 am

    Dear Sir,

    This is another opportunity for the banks to get rid of tracker mortgages. If you want to trade up how can you pay 25% of the price of the new property if you owe €50k on your current property.
    This will only suit people that wish to trade down to reduce their outstanding mortgage and therefore reduce their repayments
    Billy

  15. dominick o’hara at 10:08 am

    I am with National Irish bank Tracker and have about 40% of a debt outstanding but am employed and am only managing interest for the past 18 month. NIB are very helpful but it is a terrible financial and personal burgen.

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