Facing big loss on investment property

I bought a Section 23 in 2006 for €455k. I got a 100% mortgage from Bank of Scotland at ECB + 1.35%. It's interest only for 20 years. It's rented out at €900 per month. I reckon it's probably worth only €200k now and I want to get shut of it. I am 54 years old and don't want this hanging over me until I am 70. I also got the VAT back, so you could say that I have a VAT loan of €54k.

My home is worth €300k and my mortgage is €150k. That is also with Bank of Scotland and cross secured on the apartment.

So, I have properties worth €500k and loans of €600k. So I am in serious long-term trouble.

Can I sell the apartment and transfer the remainder of the mortgage to my house?
Would Bank of Scotland agree to writing off some of the mortgage?

The outlook is very dark for me. When I retire at 65, I will probably be still in a position where the loan equals the the value of the property and I will have no way of paying it off.

Hi Floorboard

I don't know if it's any consolation to you but many people are in a much worse position than you are.

As of now, you are in negative equity on the apartment and you are right to regret buying it. But the rental income of €10,800 covers the interest cost of €10,700. So your cash flow is not being affected too much by it.

You have a cheap tracker.
You have an interest only loan for another 16 years

Others are paying 6% interest and they have to make capital repayments. These people have an immediate and serious problem to deal with. In comparison, you are very lucky.

You are right to be thinking about solutions now, but you should not be doing your head in over it.

I don't think that Bank of Scotland will allow you sell the apartment, but it's worth asking them. There has been some talk about them doing deals on investment properties. They are trying to exit the Irish market and they might do something.

If house prices fall further, you would be better off selling your investment now.

Against that, if house prices increase over the long-term, you are better off owning €500k worth of property than €300k worth.

It's a tough situation to be in. However, it's manageable for the moment at least.

Just be aware that disposal of a sec 23 inside 10 years from date of purchase is subject to clawback of all allowance offset against rental income,just in case you were not aware of it...not wanting to add to your worries.

Knuttell said:

Just be aware that disposal of a sec 23 inside 10 years from date of purchase is subject to clawback of all allowance offset against rental income,just in case you were not aware of it...not wanting to add to your worries.

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Knuttell

Good point. Never thought of that. I am not really familiar with Section 23. Has Floorboard benefitted from Section 23 as he appears to have no other rental income? He would have set the interest payment against the rental income, so would it not be more or less the same as an ordinary investment?

Good point. Never thought of that. I am not really familiar with Section 23. Has Floorboard benefitted from Section 23 as he appears to have no other rental income? He would have set the interest payment against the rental income, so would it not be more or less the same as an ordinary investment?

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Not entirely sure why he went down the sec 23 route,generally you bought one if you had a few rentals and wanted to legally reduce your tax liability,in recent years esp in Dublin,properties qualifying for sec 23 had pretty much the amt of the allowances built into the price,bizarre in the extreme,so they made little or no sense.

With the recent changes to sec 23 in the 2011 budget,there will be no interest from the few investors looking to purchase this property,however those changes do not (for now)impact on owner occupiers.

There will be an impact study completed on the abolishing of sec 23,the interference of the Finance Minister in this matter would have caused further significant amts of defaults on properties and on small business.

Brendan is correct though,approach them and look at if they will do a deal with you and would also be correct on the fact you probably have not used any/much of the sec 23 allowance?

Floorboard said:

The outlook is very dark for me. When I retire at 65, I will probably be still in a position where the loan equals the the value of the property and I will have no way of paying it off.

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If it is the case that the loan equals the value of the property then there is no problem. I wonder is there a typo here?

Hi MrsV

I presume what he means is that the combined loans will be equal to the combined values of both properties. If prices rise, he should have good equity in his home, but will probably still be in serious negative equity on the apartment.

Thanks Brendan, that makes more sense.

Hi Floorboard,
I'd hold the investment as the financing arrangements are resulting in favourable cashflows.
Inflation is starting to take off in the Euro zone, this will erode the size of your mortgage relative to the value of the property. Things will look alot more managable at the end of your IO period and may even balance out (hopefully).

What is your monthly mortgage repayment? Is your problem how to pay back the original mortgage of 455K in 15 years?

Knuttell said:

Just be aware that disposal of a sec 23 inside 10 years from date of purchase is subject to clawback of all allowance offset against rental income,just in case you were not aware of it...not wanting to add to your worries.

Click to expand...

You also mentioned you got the VAT back as well. Have you been paying the VAT back as part of the monthly rent? IE the rent you charge INCLUDES VAT and is meant to be paid to the revenue bi-yearly.

If you were to sell the house before all this VAT money is paid back - you would have to settle all that with revenue as well.