IFG Introduces Negative Equity Protection

According to the

Up to 20% of the purchase price will be held in a bond for 5 years. If at the end of 5 years the property has fallen in value then some or all of this bond will be repaid to the buyer. The bond will be paid for by bank or developer.

e.g

• purchase price 200k
• mortgage 180k
• deposit 20k
• bond of 40k (20% of purchase price)

The purchaser will make repayments on the 180k as normal. In 5 years time if the price has fallen the bond will be used to reduce the capital and the repayments will be recalculated to reflect this.

NAMA is apparently introducing a similar scheme for it's own portfolio. It will be interesting to see what property the IFG scheme will be used for.

So as a purchaser I would want to see a 20% drop in the next 5 years, have my mortgage reduced and then hold tight for a rebound in prices?

Broadly similar to the scheme introduced by NAMA. Also quite common in the US and other countries where such policies were a mandatory requirement on HL facilities.

44brendan said:

Broadly similar to the scheme introduced by NAMA. Also quite common in the US and other countries where such policies were a mandatory requirement on HL facilities.

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Has that scheme been introduced by NAMA or just mooted?

Just mooted. No indication of whether they intend progressing it.

So the builder sells the house for €200k

He puts €40k into a trust account.

So the builder gets only €160k now and a further €40k if prices don't fall over the next 5 years.

It's very similar to what NAMA is proposing although I don't see how a broker gets involved in this. If I was buying one of these houses, I would be very careful about where the €40k goes.

Brendan

Brendan Burgess said:

He puts €40k into a trust account.

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I would imagine that the 40K would not be held under the control of the builder. My understanding is that the Bond element would be covered by an insurance policy as a contingency liability similar to those taken out by developers in favour of County Councils.

Some additional information from the brochure. I can't find it online

The interest on the money in the trust is paid to either the purchaser or the seller. The charge is deducted from the interest.

The amount deducted will be 0.9% of the purchase price.

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A €300,000 property with 20% going into trust would mean €60,000 going into trust.

€2,700 is 4.5% of the trust.

Why do you need a trust at all?

Price of property: €300k
Deposit €30k
Vendor's risk: €60k
Lender: AIB

Why not issue a mortgage of €270k and put €60k in a back-to-back account with AIB.

Repayments are calculated on €270k mortgage.
But, interest is charged on net amount i.e. €260k.

If prices have not fallen by year 5, the bank pays the €60k to the vendor and the mortgage is increased by €60k

Advantages
No risk to borrower or vendor from default of trustee.
No trustee needed so no admin cost
No taxation of interest in trustee deposit account.
Borrower is making repayments based on €270k, so by Year 5, they will have paid off a good chunk of capital.

From the point of view of the builder
They have minimal admin hassle.
As there will be a deferred payment, they can charge a bit more for the property.
If AIB goes bust, then the purchaser pays the €60k to the developer. (Might be difficult to collect, but the deed of sale can give the developer an interest in the property)