I think it's perfectly reasonable of KBC not to entertain a negative equity mortgage as you have had difficulty meeting the repayments in the recent past. So, you should be planning how best to achieve a trade up in the medium term, but not in the short term.
First let's take a look at your investment property:
Rental income| €10,000 |
Interest paid|€10,800 |€240k@4.5%
Loss before expenses and tax|€800
Although the repayment is €1,468, around €600 of this is capital. So you are paying down the negative equity by around €7,000 a year.
If you sell this investment, you will be left with an unsecured loan of €95,000. The interest on this will be around €4,000 a year. So you will have much higher losses to fund if you sell the property. This might sound counter intuitive, but work through the numbers.
In addition we are topping up the mortgage to the tune of €1,000 per month in order to reduce mortgage term and put a dent in the negative portion.
This makes financial sense. You are getting a return of 4.5% tax-free on your money by doing this.
But you will face a problem when are ready to trade up if you do not have any cash for a deposit.
Let's say that in three years' time, the house is worth €180k and the mortgage is reduced to €180k. Your credit record is repaired so KBC is happy to lend to you again.
You want to buy a house for €400,000 - you will need €40,000 cash as a deposit. But you have used your deposit to pay down the negative equity.
You will have to wait another year or two hoping that a combination of savings and house price increases will give you the deposit on a new house.
Now let's say you don't pay the €12k a year off the mortgage. After three years, you will have €40k cash and €40k negative equity.
cost of new house|€400k
Less deposit|€40k
Mortgage required|€360k
+ negative equity|€40k
Total mortgage|€400k
KBC will probably approve this mortgage. But, oddly enough, if you apply straight for a mortgage of €400k on a house worth €400k, they will probably refuse.
So what should you do?
On balance, I think it's best not to overpay your mortgage, but to build up a deposit. In the first year, this will cost you around €300 in additional interest. In the second year, it will cost you a further €800. I think it's a price worth paying for the flexibility.
Alternatively, you could ask KBC if they will allow you to overpay your mortgage now, but to withdraw the overpayments if you need to. They might not allow this, but they might allow you to use the overpayment take a payment holiday to build up the deposit.