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.
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