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

[flattea2]

Hi,

On this mornings Newstalk breakfast show, Charile Weston (of the Indo) was talking about a new product which some banks are on the verge of introducing.

The basic premise of it is that if you have negative equity but want to move house, then you can wrap up the amount you would owe to the bank from the old mortgage to the new mortgage. So I sell current house – I owe say 50k to the bank, but they will wrap it up in the new mortgage, so you still owe the bank but you get to move house.

On the one hand its very dangerous if it sinks people into further debt, however it may be beneficial to people who need to move house for whatever reason. Personally it would suit me as both my spouse and I are working but we need to move property now. However the negative equity on our property at the moment is ‘only’ about 10-20k. Our only other option is to rent out our current property and then rent another one for ourselves which we would rather not do.

Apparently the banks are doing it on the basis of ability to repay – though look where that principle got us. This may also be viewed as an attempt by the banks to get people off tracker mortgages and onto variable rate one.s

Link: http://www.independent.ie/opinion/columnists/charlie-weston/charlie-weston-mortgage-bid-to-unlock-market-could-backfire-2228556.html

This was done in the UK in the 90’s, it fuelled a bit of a rebound in the market – but I’m not sure what the long term consequences of it were.

I had a look at all of today’s posts, and it does not seem covered so apologies if I have missed it.

Thoughts?

 

[Sunny]

In theory it is not a bad idea as long as the banks stick to stringent underwriting criteria. One would hope they have learnt their lessons but I wouldn't bet on it.

 

[aristotle]

Surely those who want to move, and can afford it, can get a load to cover the difference in the mortgage and sale price of the property. This new offer should only apply to very few people but I worry that it will be given as an option to more and more people and thus get people in to additional long term debt.

Given that interest rates will eventually start to rise this could only make the ticking timebomb of private debt a bigger one.

The banks of course will love this if it means they can move people from trackers to variables.

 

[mathepac]

According to the Pat Kenny Show this morning two lenders already offer "negative equity loans" to existing customers who want to trade up. They are Ulster Bank and EBS. These loans are not advertised products per se, but facilities offered on a case-by-case basis.

 

[Pat Bateman]

This is a very positive move.

I know plenty of young couples who are stuck in apartments because they are in negative equity.

In some cases, this is preventing them from starting a family.

This may help them to purchase their own "home".

 

[Neg Covenant]

This is to be welcomed if it will be genuinely rolled out.

It gives people a prospect of getting on with their lives while they service their debts.

It also means they will be able to sell their houses at a loss allowing the market to hit the bottom and start moving.

It also allows banks to escape trackers (bad for the mortgage owner but good for the tax-payer who is subsidising the banks).

If the market does hit bottom then people who avail of this should not be materially worse off as their new loan will be secured on a more solidly valued asset (i.e., house bought in a depressed market).

This is as close as we are going to get to a NAMA for the people. Next step, bankruptcy reform and more structured debt enforcement for those who won't be able to pay their debts. We are making excruciatingly slow progress.

 

[mathepac]

This is a very positive move. ...

This is to be welcomed if it will be genuinely rolled out. ...

I think "productisation" would be a very bad move. If UB and EBS do what they say, surely that is sufficient? There is a way, for people who can demonstrably afford it, to trade up despite suffering negative equity in their current PPRs. I wonder how well stress-tested are the currently approved trade-ups? Interest-rate fluctuations, exchange-rate variations, property-value tumbles, and son on will effect them.

Jill Kerby Had a good counter-argument for negative equity mortgages in Yesterday's Sunday Times.

My fear is that if it is productised, it will lead directly to the wholesale abuses that lead directly to the current set of circumstances and the evidence is that that greed and irresponsible behaviour have not disappeared from the financial / property development sectors

 

[z107]

I'm curious as to how living in an apartment stops people from starting a family?

 

[Moral Ethos]

bankruptcy reform

Something the banks are against but is badly needed as the current legislation is in need of urgent reform to make bankruptcy an option for the little guy.

 

[TheBlock]

Having temporarily lived in a second floor two bed apartment with a toddler I have no difficulty understanding peoples reservations about wanting to raise kids in one.

 

[Sunny]

To be fair, unlike 100% mortgages and the old regulator, I think the new regulator will be monitoring it very closely. I can't see it being advertised on the sides of buses to every Tom, Dick and Harry.

 

[Complainer]

This may well create an artificial floor under property prices, particularly prices for units that were sold to first time buyers - apartments and small houses. Good (in the short term) for banks and others in negative equity, bad for the rest of this, particularly those who haven't yet purchased a property.

 

[canicemcavoy]

I'm curious as to how living in an apartment stops people from starting a family?

I'm curious too. Then again, even though I'm less than 40, I was brought up in an inner-city council flat that didn't have even a shower until I was in my late teens.

 

[Sunny]

This may well create an artificial floor under property prices, particularly prices for units that were sold to first time buyers - apartments and small houses. Good (in the short term) for banks and others in negative equity, bad for the rest of this, particularly those who haven't yet purchased a property.

How? If anything, the opposite is the case. If the product became widespread, it would lead to a large increase in the supply of apartments into the market and a large increase in the demand for larger houses so if a 'floor' was to created, it would be for the larger houses. It is actually negative for apartment prices.

I can't see this product becoming so popular that it would effect property prices anyway.

 

[DerKaiser]

I'd like to see a focus on these being a trading down option rather than a trading up option.

Someone could have a €400k mortgage on a €300k house they don't necessarily need.

A €300k mortgage on a €200k house/apartment would leave them in the same position negative equity wise, but with 25% knocked off their monthly mortgage outgoings.

I'm sure there are many people for whom the reduction in mortgage would improve their lives immeasurably even when taking account of the fact they have traded down.

 

[Complainer]

How? If anything, the opposite is the case. If the product became widespread, it would lead to a large increase in the supply of apartments into the market and a large increase in the demand for larger houses so if a 'floor' was to created, it would be for the larger houses. It is actually negative for apartment prices.

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.

I can't see this product becoming so popular that it would effect property prices anyway.

They said the same about 100% mortgages.

 

[Sunny]

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.

Either way they are taking the hit because they are selling at market rates so the price isn't artificial. If I have a €250,000 mortgage on an apartment that is now worth €220,000, I am selling that apartment at the €220,000. The only difference is that I don't have to find the €30,000 upfront to repay the bank the difference.

I presume (hope) that lessons were learnt but I guess you are right. That might be hoping for too much!

 

[Complainer]

The only difference is that I don't have to find the €30,000 upfront to repay the bank the difference.

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.

 

[Sunny]

I'd like to see a focus on these being a trading down option rather than a trading up option.

Someone could have a €400k mortgage on a €300k house they don't necessarily need.

A €300k mortgage on a €200k house/apartment would leave them in the same position negative equity wise, but with 25% knocked off their monthly mortgage outgoings.

I'm sure there are many people for whom the reduction in mortgage would improve their lives immeasurably even when taking account of the fact they have traded down.

Interesting idea.

If they are helping people trade up, they should help people trade down.

 

[Moral Ethos]

I agree with you there.