You are in the lucky position that you can actually sell and can afford to pay the mortgage shortfall. I think you should go for it.
You will not be in a position to trade up to a 3 bed house for some years to come, so you are better off renting a suitable house than owning an unsuitable house.
The one issue which could change this is if you have a really low tracker mortgage. €143k at 2% would be only €3,000 a year. Presumably renting would cost you at least €8,000 a year.
As Ceist says, it is worth doing the numbers to see if you should rent out the apartment. €125k @2% = €2,500 which is the real cost of keeping it.
If you get €6,000 rent, it may be worth keeping, depending on your view of how the price for the apartment may move.
But first decision is to rent a suitable house.
Second decision is whether to sell or keep the apartment.