Banks to offer mortgages to facilitate moving house where negative equity is present

[Pat Bateman]

This product allows owners to sell at artifically increased prices. In the current situation, they can't bring their negative equity with them, so they are forced to sell at current market rates and take the hit on the equity. With these mortgages, they don't have to face up to their equity, so the they are selling at an artificial price.

I do take your point about possible increased numbers of apartments on the market.


They said the same about 100% mortgages.

We need to remember that we're a society first rather than an economy. This move should give greater fluidity to younger people who might be otherwise trapped in properties they don't want to be in.

Once they can afford the new property, I fail to see any issue with this. Without such a mechanism, the seller might end up with an unsecured personal loan after they've sold their property. Now, the excess will be secured on the new property which should be better for the banks too. And with this mechanism, the entire loan is transferred to a more valuable property with a (presumably) healthy LTV. And, as others have mentiuoned, the banks can get people off tracker mortgages.

This is a win-win.

 

[Neg Covenant]

That's my point - if you don't have to find the €30k, you are far more likely to proceed with this transaction, and allow the €220k sale to proceed.

Without this product, the transaction would probably not take place at all - and this would result in prices being driven further down. Maybe it would have a bigger impact on artificially holding up prices in the trader-upper band than the FTB band.

You're getting it totally backwards there Complainer. Currently the transaction cannot take place at the price people are willing to offer because of the seller's negative equity. This means that the fact that people cannot take their negative equity with them is making it harder for people to buy property for their true (low) value. Allowing the seller to drop their price to meet the purchaser (and the purchaser's bank) is not putting an artificial floor under the market.

 

[z107]

My main concern with this scheme would be that people end up in a worse situation, with even more negative equity. This could also put banks (taxpayers) in a worse position. I'm not allowed to mention house prices here, so I can't post any more than that.

With regards apartments not being suitable for raising children, well I too (like many million other people the world over) spent the first few years of my life in a one bedroom flat. Of course it's not as ideal as having a 3/4 bed semi with garden etc, but in the whole scheme of things even Irish 'shoe boxes' are far better than where the majority of the world's population live.

Anyone who delays starting a family just because of living in an apartment really needs to think things through a bit more. In my opinion.

 

[Brendan Burgess]

A few points here.

If someone can't afford to have children now, should they not delay having them until they can?

What is to stop people letting their apartments and renting a house? Why do they have to buy a more expensive house?

Brendan

 

[z107]

If someone can't afford to have children now, should they not delay having them until they can?

This really is a personal decision, there is no right or wrong answer.
I would say that if people want to start a family, they shouldn't delay for financial reasons.
If they delay, there's the possibility they might never have children. Live with least regret.

 

[Pat Bateman]

If someone can't afford to have children now, should they not delay having them until they can?

What is to stop people letting their apartments and renting a house? Why do they have to buy a more expensive house?

Brendan

I take Umop3p!sdn's point.

However, I think it's responsible to wait until you can afford to have children before doing so.

Renting is certainly an option but most people (given the choice) seem to prefer the certainty of owning their own home.

For a certain section of society, this "portable negative equity" should be useful.

On reflection I think it may also help the economy and the Exchequer.

 

[Brendan Burgess]

Renting is certainly an option but most people (given the choice) seem to prefer the certainty of owning their own home.

This has to be balanced against the uncertainty caused by overindebtedness and negative equity.

Brendan

 

[Pat Bateman]

This has to be balanced against the uncertainty caused by overindebtedness and negative equity.

Brendan

Of course, but this "product" seems to be for people who can manage the relevant repayments but don't have the necessary capital to clear the negative equity.

If this initiative facilitates their move from a smaller (and possibly unsuitable) property to what's going to be their "family home" (i.e. somewhere they expect to live for the long term), the significance of negative equity and indebtedness as considerations should decrease.

 

[MelF]

A few points here.

If someone can't afford to have children now, should they not delay having them until they can?

What is to stop people letting their apartments and renting a house? Why do they have to buy a more expensive house?

Brendan

Simple answer Brendan, unreliable tenants in the first instance and unreliable landlords in the second!!

 

[Chris]

You're getting it totally backwards there Complainer. Currently the transaction cannot take place at the price people are willing to offer because of the seller's negative equity. This means that the fact that people cannot take their negative equity with them is making it harder for people to buy property for their true (low) value. Allowing the seller to drop their price to meet the purchaser (and the purchaser's bank) is not putting an artificial floor under the market.

This would only be correct if there wasn't already a massive oversupply of houses that are not selling. The only reason houses are not selling is because those few potential buyers still think that prices are too high.

What is to stop people letting their apartments and renting a house? Why do they have to buy a more expensive house?

Couldn't agree more! Even after prices for houses plummeted, it is cheaper to rent most houses than to service a mortgage on them. I am currently renting a house for my family in an area where I still couldn't afford to buy, and my rent is lower than the cost of servicing mortgage debt in an area I could afford. It's a no-brainer for me, renting is great!!
And before people state the usual "renting is dead money", please take account of the fact that mortgage interest is "dead money" too.

Of course, but this "product" seems to be for people who can manage the relevant repayments but don't have the necessary capital to clear the negative equity.

There is a reocurring theme in posts, that banks and the regulator will now get it right. This happens after every economic crisis; more regulations and a new regulator are introduced, and all of a sudden everything will be OK. It never is, and setting up negative equity mortgage products is just repeating past mistakes.

 

[Sunny]

People are getting their knickers in a twist over this. There is no suggestion that the banks are going to make this widely available. Even the regualtor said they would have a dim view of it so will more than likely make the banks hold more capital against these loans if they allow them at all. Der Kaiser made a good point on the previous page. Something like this could help some people trade down and reduce their mortgage payments. However, I am not a fan of interfering with the housing market so will remain sceptical about it all.

As I said before, I will only worry when I see the product being advertised on buses.

 

[DerKaiser]

This would only be correct if there wasn't already a massive oversupply of houses that are not selling. The only reason houses are not selling is because those few potential buyers still think that prices are too high.

Either way, the albatross of high mortgages around the necks of homeowners is currently distorting the market. Allowing people (with the means to do so) to trade despite being in negative equity would represent the removal of a distortion to the market, not the introduction of one

 

[MelF]

Couldn't agree more! Even after prices for houses plummeted, it is cheaper to rent most houses than to service a mortgage on them. I am currently renting a house for my family in an area where I still couldn't afford to buy, and my rent is lower than the cost of servicing mortgage debt in an area I could afford. It's a no-brainer for me, renting is great!!
And before people state the usual "renting is dead money", please take account of the fact that mortgage interest is "dead money" too.



.

But are you also renting out a house that you own? All fine and dandy if you're not but in renting out the house that you want to move from you have the hassle, the PRTB admin taxation etc, the potential for voids etc plus the uncertainty of finding/keeping tenants etc. That's before you factor in losing your PPR relief when you are able to sell. And there may be no long-term security in the property you rent for yourself, so for many people its a whole lot safer to trade up.

 

[Complainer]

If someone can't afford to have children now, should they not delay having them until they can?

Have you heard about biological clocks? Female fertility decreases dramatically in the late 30s and into the 40s. One in five couples attempting to have children have fertility problems. The longer you delay, the more likely you are to have problems.

What is to stop people letting their apartments and renting a house? Why do they have to buy a more expensive house?

Probably the fact that there are often no houses available at comparable prices, without moving way out of the cities, and taking on a long-distance commuting lifestyle.

My main concern with this scheme would be that people end up in a worse situation, with even more negative equity. This could also put banks (taxpayers) in a worse position.

It's not often we agree, but I'm with you on this one.

You're getting it totally backwards there Complainer. Currently the transaction cannot take place at the price people are willing to offer because of the seller's negative equity. This means that the fact that people cannot take their negative equity with them is making it harder for people to buy property for their true (low) value. Allowing the seller to drop their price to meet the purchaser (and the purchaser's bank) is not putting an artificial floor under the market.

Your position is based on the assumption that the current market price is the true low value. I don't believe that this is the case, and I believe that the market still has way to fall. These transactions will stop that fall.

We need to remember that we're a society first rather than an economy. This move should give greater fluidity to younger people who might be otherwise trapped in properties they don't want to be in.

Once they can afford the new property, I fail to see any issue with this. Without such a mechanism, the seller might end up with an unsecured personal loan after they've sold their property. Now, the excess will be secured on the new property which should be better for the banks too. And with this mechanism, the entire loan is transferred to a more valuable property with a (presumably) healthy LTV. And, as others have mentiuoned, the banks can get people off tracker mortgages.

This is a win-win.

I agree with your first point - we are a society, and we need to take a long term view on what is good for society. This short-term rush to get people into properties that they can't afford is exactly what got us into our current mess and has caused huge damage for society as a whole. Your assumption about healthy LTVs is way off - they will most likely be continuing to be in negative equity in the new property, amd maybe even more negative than before.

 

[Sunny]

Your position is based on the assumption that the current market price is the true low value. I don't believe that this is the case, and I believe that the market still has way to fall. These transactions will stop that fall.

.

It doesn't matter what you or economists or anyone else thinks about the housing market. If I am selling an apartment with a mortage of €250,000 for €220,000 and I find a buyer willing to pay that price, then that is the market price or the true value. This product simply allows that transaction to take place. It doesn't put an artificial price on the property.

 

[DerKaiser]

It doesn't matter what you or economists or anyone else thinks about the housing market. If I am selling an apartment with a mortage of €250,000 for €220,000 and I find a buyer willing to pay that price, then that is the market price or the true value. This product simply allows that transaction to take place. It doesn't put an artificial price on the property.

That would be the logic I'd follow, removing distortions (such as people being trapped in negative equity) generally leads to a more efficienct, transparent and liquid market, circumstance more likely to yield a true value.

Complainer's point is that all the people currently engaged in property transactions, Let's call them "The Market", are deluded. They are trading at values inflated well above the "True Value" as defined by complainer.

Anything that has the impact of preventing "The Market" from approaching Complainer's "True Value" could be seen as an artificial intrusion.

Sarcasm aside, complainer is probably as likely to be correct as the market!

 

[gaius]

I wonder what kind of rates banks would be charging for these "NE mortgages". Sub-prime rates perhaps?

 

[flattea2]

Sunny’s point, ‘I’ll be worried when we see them advertised on the side of buses’, I think really hits the crux of the issue. Straight away it makes me think of the 100% mortgages that were offered.

I think they are suited though on a case by case basis to:

• Households with income of say 100k+, preferably where there are 2 incomes, and where we can say the jobs are ‘relatively’ secure.
• Where the current mortgage repayment is comfortably being paid, leading to point 3
• Where the new repayment will still be well within borrower’s capacity, here the regulator may need to make the call on what percentage of disposable income is acceptable. Prices are currently low so over time there should be some ‘up-side’
• Where there is evidence that it is a real need for the borrower to move eg change of job or other suitable circumstance

Taking a case where say we have two people earning 50k each. Their disposable income is approx 6k a month. If they borrowed 250k in 2005, their repayment is about 900-1000 a month (depending on term of loan). This suggests about 15-17% of disposable income is covering the mortgage. Certainly room there if they wanted to cut their losses (depending of course on current outstanding mortgage and what they could get on the market for their current property)

 

[Chris]

Either way, the albatross of high mortgages around the necks of homeowners is currently distorting the market. Allowing people (with the means to do so) to trade despite being in negative equity would represent the removal of a distortion to the market, not the introduction of one

If people actually had the means they would be taking out loans to cover the negative equity when selling. As this is not happening, or at least not in any numbers that are significant enough to be reported on, I have to assume that most people in negative equity either cannot trade up/down, or do not want to.
Having people go into even more debt than they are are already in is not going to solve anything. If people in negative equity want to trade up they should do something to reduce the negative equity and not take on more debt.

But are you also renting out a house that you own? All fine and dandy if you're not but in renting out the house that you want to move from you have the hassle, the PRTB admin taxation etc, the potential for voids etc plus the uncertainty of finding/keeping tenants etc. That's before you factor in losing your PPR relief when you are able to sell. And there may be no long-term security in the property you rent for yourself, so for many people its a whole lot safer to trade up.

No, we do not own a property any more, we sold and decided to rent. While there is hassle in letting out a property and then renting another to live in, the bottom line is that this is a very workable solution. But people are blinded by an obsession of having to live in a house they own.

 

[Sunny]

If people actually had the means they would be taking out loans to cover the negative equity when selling. .

That's what this mortgage product is. A loan to cover the negative equity.
One of the reasons why people in negative equity cannot sell is that they need the banks permission if they can't pay off the entire outstanding mortgage.