PERSONAL FINANCE: Negative equity can prevent trading up or trading down, but in the UK lenders are now offering creative solutions to the problem. In Ireland, more informal agreements are sometimes available to help homeowers out of a locked-in situation
IRISH HOMEOWNERS trapped in negative equity may have read with envy that UK banking group Lloyds is now offering an escape route to customers with underwater mortgages through its new Equity Support Scheme.
The deal allows customers of Lloyds TSB, Halifax and Cheltenham Gloucester to use their savings as a deposit towards a new property, rather than using them to plug their negative-equity gap. No additional borrowing is allowed, but this niche product will assist people where a move is a necessity.
Although no such over-the-counter offering has been officially launched in the Irish market, some lenders are quietly facilitating customers on a case-by-case basis.
David Duffy of the Economic and Social Research Institute (ESRI) estimates that the number of borrowers in negative equity reached 300,000 at the end of 2010, based on a peak-to-trough fall in property prices of 40 to 45 per cent. The majority are first-time buyers who purchased close to the peak.
Because this group tended to take out 100 per cent mortgages, any dip in the value of their property immediately pushed them underwater. Many of these homeowners now wish to move on or trade up, but find themselves unable to do so because the proceeds from selling their property would be nowhere near enough to pay off their mortgage.
Last summer, it emerged that a number of lenders in Ireland were looking at introducing negative-equity mortgages. This typically allow borrowers to carry over the excess amount owed to their bank onto a new mortgage.
However, in July the Central Bank called a halt to this, contacting all mortgage lenders and requesting them to stop offering negative-equity mortgage products.
The Central Bank was concerned people could dig themselves further into debt, and end up overexposed and struggling to meet their repayments.
Most mortgage lenders informed the
Central Bank that they did not intend to introduce this type of product. However, a small number of lenders said where an existing customer approached them requesting some type of arrangement involving negative equity, they might consider advancing a mortgage but only on the basis that it would be in the best interests of the customer and the institution.
Strict criteria relating to net disposable income, loan-to-value ratios, income multiples, credit histories and so on would have to be met in any such cases and agreed in advance with the Central Bank.
The Central Bank has banned lenders from actively promoting or advertising this type of arrangement, but if a customer’s situation meets the necessary criteria they may be able to assist them.
There is anecdotal evidence that this is now happening, albeit on a limited basis.
Frank Conway, a director at the Irish Mortgage Corporation, encountered one woman whose marriage had broken down and her husband had moved out of the family home. As she was unlikely to be able to meet the full mortgage repayments on the property herself, she was looking at selling it.
The outstanding mortgage on the property was €380,000, but the house, which was bought at the height of the boom, had fallen in value to about €220,000. This would leave a negative equity hole of €160,000. She discussed the predicament with her lender, and they came up with a deal which would allow her to move on. If €220,000 were realised from the sale of the house, it would be offset against the mortgage. The balance of €160,000 would be converted into an unsecured personal debt, which she would be allowed to repay on the same terms as the original mortgage (ie, over 32 years, and at her existing tracker rate).
Conway was also contacted recently by a financial professional who had borrowed about €1.7 million to buy a house which he was now forced to sell because of a change in his personal circumstances. He was being offered just €900,000 for the property, which would leave him €800,000 underwater.
His lender offered to “cut him a deal” that took into account the fact he also owned multiple investment properties. The bank would allow him to sell his home and chip away at the resulting €800,000 deficit, repaying just €500 a month for 25 years. As this would only wipe out a fraction of the amount owed, he would have to make a large balloon payment at the end of the 25-year term to repay the balance. The deal was structured on the presumption that the customer’s circumstances would improve in the intervening years, but it was also secured on his investment properties, which could be sold if necessary.
According to Conway, banks are getting customers to submit detailed information on their income and expenditure and are “vetting” these figures “very thoroughly” to see if people are genuinely in difficulty, and that there is a real need to move on.
In his experience, banks are not writing off negative equity debt, but in situations where people are facing the type of circumstances outlined above, lenders “have little choice but to show some sort of ability to work” with the customer.
Ronan Lyons, economist with property website daft.ie, says the option to “bring the [negative equity] debt with you” should be available in the Irish market where appropriate, for instance, if an individual is in secure employment and is looking to move from a small apartment to a house because they have started a family.
“The new government should be looking to make sure that where possible negative equity isn’t a stumbling block to getting a new mortgage,” Lyons says.
He also says if the negative equity problem becomes “severe enough”, the government should consider introducing income-tax breaks for people who have to let out their home in order to rent another property that better suits their changed circumstances.
Duffy says while negative-equity mortgages can facilitate people who need to move house and therefore “add some mobility to the housing market”, they have to be looked at carefully as there can be downsides.
For instance, if the borrower is trading up, they can end up with an even higher loan-to-value ratio.
The Government’s expert group on mortgage arrears and personal debt has recommended that lenders should give further consideration to facilitating trading down by borrowers in negative equity, as this could reduce their mortgage debt and result in more affordable monthly repayments.
For the moment, though, lenders are constrained in what they can do.
The upshot is that for most homeowners trapped in negative equity, there are only three realistic options: use every spare penny to pay off the debt overhang; get tenants into their current home and rent another property; or avoid crystallising the loss by staying put.
The new government should be looking to make sure that, where possible, negative equity isn’t a stumbling block to getting a new mortgage
Can't see why the Central Bank won't allow theses mortgages. At least, it will let people move to secure jobs.