In negative equity but would like to purchase another property

DavidKoresh

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Hi there,

I own a property with my brother and we are deep in negative equity. The property is worth c€300K and we have a mortgage outstanding of almost €800k. However, this is a tracker mortgage with an exceptionally good rate and even though I could reduce my borrowings I wouldn't want to because of the incredibly good rate. Notwithstanding my mortgage, I have managed to save up about €250k over the last few years and I would now like to purchase a property to rent out for approx €300K.

At a push I could buy a property with cash, but this isn't the most tax efficient way to do things. Given that there is 1) such high negative equity on my first property but also 2) a demonstrated capacity to save €250K over 4 years with that much cash in the bank my question is: What is the best way to apply for and get a mortgage? Would a bank be prepared to give a mortgage provided I placed a significant amount of money on deposit for a period of time?
 
Maybe when you are applying for the mortgage, you could cut down on paperwork by applying to be put immediately into MARP?

Brendan
 
Thanks for the smug comments gents. I asked this question on behalf of someone else and not in relation to myself. By the by, my own mortgage difficulties were resolved last year.
 
Hi David

Apologies for my smug comments.

You might update the other thread on how you resolved your own difficulties.

Let's try to untangle your current question.

Should a person with €250k cash take out a mortgage to buy an investment property?
Absolutely not.
The interest rate paid will be far higher than the highest possible interest rate receivable on deposit. They will get tax relief on 75% of the interest paid, but they will pay DIRT and USC on the deposit interest.

So that probably makes your question irrelevant. They should not take out a mortgage , so it does not matter if they will get a mortgage or not.

Should a person in deep negative equity buy another property for cash?
Probably not.

A very important aspect of financial planning is flexibility. If things change, you may need access to the cash in a hurry. If it's tied up in another rented property, you won't be able to access it.

What if your brother wants to be bought out? The lender might do a deal if you pay down some of the tracker. Having a lump of cash available may make this possible.

What if things go badly for you and you can't meet the repayments? You could lose the tracker. If you have the cash available you will never fall into arrears and so will keep the tracker.

What if the bank introduces a scheme for encouraging people off trackers? They might give you €300k off your mortgage for paying €240k in cash.

Should a person with half a share in a €300k property buy another property?
Again, probably not. You should diversify your investments across different asset classes.

You should probably invest the money directly in shares.

  • It's better diversification
  • The long-term return should be better from shares than property
  • Shares are liquid, should you need some or all of the money in a hurry
Is the jointly owned property an investment or a home?

If it's an investment property, then you will have a big unrealised CGT loss. This could come in useful if you invest in shares and make good capital gains. Investing in shares directly is generally better than buying some sort of fund or ETF where the capital gain might not be available for set off against the loss on the property.
 
Thank you Brendan, what you say makes a lot of sense.

I suppose what my friend was hoping to do was to borrow a proportion - say €150K and invest €150K of her own money. This would leave her with €100K in reserve (should an opportunity arise such as you mentioned) and she would build on this with savings and now rental income from this new property.

The money placed on deposit wouldn't be intended to be there for the duration of the mortgage. She hasn't approached any lender yet but anticipates difficulty because of her negative equity situation.
 
I own a property with my brother and we are deep in negative equity. The property is worth c€300K and we have a mortgage outstanding of almost €800k. However, this is a tracker mortgage with an exceptionally good rate and even though I could reduce my borrowings I wouldn't want to because of the incredibly good rate.

There is no way I can see a bank loaning you money to buy again. How on earth is the loan to value so bad, that was some chronic investment property. Is the rent covering the tracker, taxes and running costs. 800K is one heck of a mortgage? My mind boggles at how much rent you'd have to achieve to square that?

Another downside is owning a property with somebody else, but brother isn't too bad.

Actually that mortgage makes no sense to me whatsoever. Something is missing in the story.
 
Thanks for the smug comments gents. I asked this question on behalf of someone else and not in relation to myself. By the by, my own mortgage difficulties were resolved last year.

My comment wasn't "smug", when you start your post with "I" what are people supposed to think?
 
There is no way I can see a bank loaning you money to buy again. How on earth is the loan to value so bad, that was some chronic investing property. Is the rent covering the tracker, taxes and running costs. 800K is one heck of a mortgage? My mind boggles at how much rent you'd have to achieve to square that?

Another downside is owning a property with somebody else, but brother isn't too bad.

Actually that mortgage makes no sense to me whatsoever. Something is missing in the story.

There is no way I can see a bank loaning you money to buy again. How on earth is the loan to value so bad, that was some chronic investing property. Is the rent covering the tracker, taxes and running costs. 800K is one heck of a mortgage? My mind boggles at how much rent you'd have to achieve to square that?

Another downside is owning a property with somebody else, but brother isn't too bad.

Actually that mortgage makes no sense to me whatsoever. Something is missing in the story.

Nothing is missing in the story, you've added in elements that I never said.

1) I never said that the house bought with this person's brother was an investment property. It's a home, so therefore it is not rented out.

2) How on earth is the LTV so bad? Well take a look at what property prices have done in the Citywest area. Hindsight is a great thing, but they were amongst many who bought in 2007.

3) They have both been comfortably paying their mortgage and at the same time saving over €7k per month between them, which has accumulated in a deposit account. This person is looking to borrow just 40% of the property price. The rest and additional money for repairs and refurb will come from her own savings.

4) For Brendan - She is very reluctant to invest in shares as many many people believe that there is now a significant bubble in equity markets. It could be as bad as buying Irish bank shares in 2007!
 
1) I never said that the house bought with this person's brother was an investment property. It's a home, so therefore it is not rented out.

Sorry I got that mixed up, but it is of course also an investment even if it is a home.

What is the OP trying to do, put the savings of 250K to better use I assume. But there is no way they will be able to purchase property, not with a mortgage.

I'd be very woried about the seizable NE on the home, as if one of the two loses a job it would be a dire situation. So looking at paying down the NE, overpaying the mortgage and splitting up the ownership would be a good idea. A lot of people want to hold onto their trackers at all costs, but sometimes it might make better sense to pay them off early.
 
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