Trade up with negative equity - What to do?

mcl

Registered User
Messages
16
Hi guys,

I'm Looking for some advice as regards what to do with Negative Equity etc..

Long story short..

We Have a 3 bed-semi in Kildare Commuter belt - current value c. €145K

Current Mortgage outstanding on above €240K - negative equity €95K - term remaining on mortgage 22 years.

The Monthly mortgage repayment on the above at 4.59% APR is €1,468

Myself + Wife are self Employed (Both Directors) Combined salaries €100K gross.

No Loans, Credit Card kept In check.

Some arrears did accrue on the above mortgage during a bad patch and we had a interest only restructuring plan put in place for a period - however arrears are now cleared and the mortgage account is in credit to the tune of €5K.

We are currently renting out the above property and are renting ourselves in Dublin as it makes logistical sense and has us in proximity to family.

The monthly rental income received is €850 and we are covering the shortfall of €618 to meet the annuity.

We are currently paying €1,150 to rent in Dublin (touch wood), so that's €1760 in total between rent & our mortgage. In addition we are topping up the mortgage to the tune of €1,000 per month in order to reduce mortgage term and put a dent in the negative portion. So €2,760 pumped into accommodation black hole and we still have > €2K disposable after this.

Ideally we would like to get rid of the house in Kildare, taking the negative portion and trading up in Dublin (even though it would probably be a smaller house!). We are not cut out to be landlords and it's not exactly a profitable game based on the above! :)

However... after approaching our Bank we have been told that they will not entertain a trade-up on the basis that there has been a restructuring plan in place within the last 2 years?! On paper we could well afford to cover a new mortgage that absorbs the negative and to the bank it represents what we think is a no-brainer opportunity for them to get new & better business, but they are hard-line on this. I guess it's just their Risk matrix being applied?? I'm not sure if I can name the Bank here, but lets just say they come from a country famous for Waffles, Beer and fries :D

We do not see ourselves moving back to the house in Kildare as we are very settled now (Kids/School etc) and all we really want to do is invest in our own home in Dublin and not have to deal with the stress of being a reluctant landlord and also the stress of increasing rents in Dublin and the insecurity of renting in general.

So what to do.....any suggestions greatly appreciated!

N
 
Based on the income and nature of it versus outstanding mortgae i would say it's unlikely at present.

Even if it is possible you will need a deposit to cover costs and a proportion of the house price. Due to that I'd stop overpaying the mortgage and saving the money then you may have a stronger case if you build a large deposit.
 
I think it's perfectly reasonable of KBC not to entertain a negative equity mortgage as you have had difficulty meeting the repayments in the recent past. So, you should be planning how best to achieve a trade up in the medium term, but not in the short term.

First let's take a look at your investment property:

Rental income| €10,000 |
Interest paid|€10,800 |€[email protected]%
Loss before expenses and tax|€800
Although the repayment is €1,468, around €600 of this is capital. So you are paying down the negative equity by around €7,000 a year.

If you sell this investment, you will be left with an unsecured loan of €95,000. The interest on this will be around €4,000 a year. So you will have much higher losses to fund if you sell the property. This might sound counter intuitive, but work through the numbers.

In addition we are topping up the mortgage to the tune of €1,000 per month in order to reduce mortgage term and put a dent in the negative portion.
This makes financial sense. You are getting a return of 4.5% tax-free on your money by doing this.

But you will face a problem when are ready to trade up if you do not have any cash for a deposit.

Let's say that in three years' time, the house is worth €180k and the mortgage is reduced to €180k. Your credit record is repaired so KBC is happy to lend to you again.

You want to buy a house for €400,000 - you will need €40,000 cash as a deposit. But you have used your deposit to pay down the negative equity.

You will have to wait another year or two hoping that a combination of savings and house price increases will give you the deposit on a new house.

Now let's say you don't pay the €12k a year off the mortgage. After three years, you will have €40k cash and €40k negative equity.

cost of new house|€400k
Less deposit|€40k
Mortgage required|€360k
+ negative equity|€40k
Total mortgage|€400k
KBC will probably approve this mortgage. But, oddly enough, if you apply straight for a mortgage of €400k on a house worth €400k, they will probably refuse.

So what should you do?

On balance, I think it's best not to overpay your mortgage, but to build up a deposit. In the first year, this will cost you around €300 in additional interest. In the second year, it will cost you a further €800. I think it's a price worth paying for the flexibility.

Alternatively, you could ask KBC if they will allow you to overpay your mortgage now, but to withdraw the overpayments if you need to. They might not allow this, but they might allow you to use the overpayment take a payment holiday to build up the deposit.
 
Hi Guys,

Many thanks for your replies on this. @Brendan thanks to you in particular for fleshing out the numbers, it made things much clearer for us.

If we had a €36,000 deposit to hand now would you have any views on how we an use this to our benefit before we go talking to KBC again about a trade up? Note: We are looking at properties in the €350K region.

Thanks,

N
 
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