Want to trade up with large negative equity

My husband and I bought an apartment 2 1/2 years ago. Like a lot of people we are now in negative equity. We are both employed and are able to make our mortgage repayments. We bought the apartment as a stepping stone onto the property ladder as we couldn't afford a house at the time. However, we would like to buy a house in the next year as we would like to start a family.

There is approx €350k left on our mortgage and the apartment is worth approx €200k (although that might be a bit optimistic!). We have €15k in savings.

Based on our salaries now, we would qualify for a mortgage of €550k. The house prices that we are looking at are €350k.

I know there are a lot of discussions on negative equity within the forums but I can't find any where there is such a large negative equity.

My question is: are there any situations that you are aware of where the bank will transfer the negative equity from one property to another? The risk is the same to the bank as, if we default, the loss on the mortgage will be the same (€350k mortgage on apt value of €200k = €150k loss versus €500k mortgage on house value of €350k = €150k loss). I understand that there are other costs to consider here also e.g. solicitors fees, but is my basic understanding correct?

Also, would it be best to put all our savings for the next year against our mortgage or go 50/50?

I know some of the advice to people in negative equity was to keep paying into their mortgage until they come out of negative equity but as ours is so large, it could take 15 years for this to happen. I don't expect the apartment value to increase significantly in the next few years.

I'd appreciate any advice anyone has.

Don't know anything about the negative equity thing, but try to avoid putting all of your savings into the house. You will be left managing solely on the incomes again and having to borrow for large expenses like holidays, changing the car etc.
Remember if you have a child you need to factor in childcare costs of 800 to 1000 euro a month, or the loss of one income.
So bear that in mind when deciding what you can afford.
What you can afford today might not be what you can afford in 10 years time.

The risk is the same to the bank as, if we default, the loss on the mortgage will be the same (€350k mortgage on apt value of €200k = €150k loss versus €500k mortgage on house value of €350k = €150k loss).

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No, the risk is not the same to the bank or to you.

You owe €350k which you can pay comfortably. In fact, you can well afford to reduce the negative equity slowly but surely over the next few years, thus reducing your risk and the bank's risk.

If you end up with total borrowings of €500k, the chances of default will be higher. If prices fall a further 10%, then your negative equity will increase by €35k rather than by €20k.

You must forget about trading up for the forseeable future. But don't despair. In time you will begin to reduce the negative equity. Your salaries may increase. Apartment prices may start increasing which would reduce the negative equity further.

In time, the negative equity will be a lot smaller as a percentage of the value of the home, and by then, there may be products around which will allow you trade up, even if you have negative equity. In Britain, the Nationwide Building Society do 125% mortgages for people such as yourselves.

If the interest rate on the savings is less than the rate you are paying on your mortgage, you may wish to consider paying it against the mortgage.

As you are both on big salaries, you can accumulate cash again if you need it.

Brendan

If the bank gave you a loan for €500k, it is likely that it would be a 90% LTV. This would require that you have €50k saved towards the purchase price plus the costs of moving, redecoration, legal fees etc. So ignoring the negative equity situation you probably require at least an additional year of savings to fund the move.

Depending on the rate you are on with your mortgage, you may be able to get an equivalent or higher rate on savings. If this is the case, saving rather than paying down more of the loan may give you more flexibility without incurring a higher net interest bill in the long term.

Another consideration suggested on AAM many times before is to rent your apartment and rent a house that meets your needs.

You can't afford to move. As a previous poster pointed out, the days of banks giving 100% LTV are virtually over, therefore you will need approx €35k of a deposit, €16k to cover stamp duty and another €5k to cover solicitors, estate agents, surveyors etc. Therefore you need to accumulate savings of around €55k-€60k before you can even contemplate moving.

Best advice I can therefore give is to firstly start saving and start saving significantly. Once you do have sufficent funds together, it may be worth considering renting out the appartment to try and at least cover most of the mortgage, whilst you purchase elsewhere.

Bear in mind as well that smallies are expensive, your income will fall whilst one of you is off work, your costs will go up hence you need to be careful about taking on a big mortgage?. You don't need a garden until kids start walking, hence you could put your head down for 2-3 years and try and save until that time comes

baxter2006 said:

We have €15k in savings.

Based on our salaries now, we would qualify for a mortgage of €550k. .

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If your salaries are so good as to qualify you for a 550K mortgage why are your savings so low?

Even if you didn't have your current apartment you don't even have a 10% deposit never mind legal and tax fees.

How large is the apartment? If it's a two bed would it be suitable for a baby?

My partner and I are in a similar situation to the OP, except we bought a small terraced house in a working-class area of the city, not an apartment. Our figures are close enough to the OP's also, in terms of property value, salaries etc. But because we bought a house, not an apartment, our proposed solution to the negative equity conundrum (to extend) is not available to the OP. But for what it is worth, here's what we plan to do.

We have accepted that there is no way we can trade up for probably the next decade or so. In the meantime, we have reluctantly decided to extend and renovate the existing house, which will cost about 100k (from very small 2 bed to reasonable-sized 3 bed). This means we can start a family more or less straight away, and even have 2 kids when it becomes a 3 bed. To fund this, we will get 50k saved as fast as possible (we'll need another year and a half at least), and then try and to borrow the other 50k as a personal loan over a short period (4 or 5 years or so).

In the meantime, we've also stepped up the repayments on the mortgage by a moderate amount - €200 per month (our focus is more on savings at the moment).

Our hope is that in 8 or 9 years time, we will be in a much stronger position for a potential move to a better area. With even a modest recovery in house prices of just a few per cent, the overpayments on the mortgage, and the increased value of our home due to the extension, we hope to then be closer to being able to move.

Sorry to OP for hijacking your thread. The road out of heavy negative equity will be a long and difficult one for all of us, but I believe the road does exist.

Hi Riad

1)

we've also stepped up the repayments on the mortgage by a moderate amount - €200 per month (our focus is more on savings at the moment).

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If you are going to extend, it is more important to have the cash available to you, so don't overpay your mortgage. It will be a lot cheaper in the long term particularly when you consider the cost of unsecured borrowing.

2)

and the increased value of our home due to the extension

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Building the extension is more likely to delay things for you than to speed them up. In general, home improvements increase the value of a property by less than the amount spent. This is not always obvious to people as the general increase in house prices makes it difficult to see this.

If you want to trade out of the area you are in, pay off your mortgage as quickly as possible and hope that house prices rise.

Brendan

Hi Brendan. Thanks for the advice. I agree that the full cost of an extension is never manifested in the value of the house. We estimate that if we spend the 100k on an extension, our house value would only go from around 250k (what similar 2-bed houses to ours are going for in current market) to around 310k (what renovated 3 beds are going for currently in our area). That's a "loss" of probably 40% on the cost of the extension.

But the problem is we must build the extension in order to have room for a family, we've no choice. The house is currently a tiny 2 bed, and could do with a new kitchen anyway. If we choose not to extend, it would be tight enough for space with one child and impossible with two. Even if we don't build and put our savings off the mortgage instead, it will still be years before we can move, and we don't want to wait that long to have the family we want. If we extend, at least we can comfortably house kids in the meantime.

The 40% "loss" on the extension is a cost we must swallow in order to have space to start a family now. It's unfortunate, but I can't see another solution.

On issue 1), you've got a good point. Our original rationale was that my partner's credit union (a public sector profession CU) has told us it will lend us the 50k at a cheap 'home improvment' rate roughly equivalent to our mortgage rate. So we hopefully won't be taking on the 50k over 4 or 5 years on a penal 10% unsecured rate, thank god.

€200 a month, for the next 18 months that we are saving cash for extension, works out at a total of €3,600. Maybe we will stop overpaying, it would be €3,600 less we would have to borrow. It's just that, mentally, I wanted to at least make a token effort to start chipping away now at the negative equity. The extra €200 will knock 6 or 7 years off the mortgage term.

No matter which way you look at it, there's no magic solution to ridding ourselves of negative equity. All we can do is pay off the loan asap and take our medicine. We were unlucky (we also got stung for FTB stamp duty shortly before it was abolished ... grrrrr...) but that's life.

It's just that, mentally, I wanted to at least make a token effort to start chipping away now at the negative equity.

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People tend to think illogically about money and it costs them a lot.

Which of the following is better for you:

Mortgage of €100,000 and €5,000 savings.

Mortgage of €99,000 and €4,000 saving.

The net debt is the same- €95,000. The difference is that with €5,000 of savings you will have to borrow less.

Family matters are not my strong point, but I would wait until you are at least expecting a child, before doing anything on the extension. Ideally you should wait until you have the second child before extending. You are probably going to have to move out anyway.

Which is an interesting point. Could you leave the house as it is and let it when you have the child. then rent a house which meets your then needs - right location and right size. You would lose a lot less than building an extension which will set you back around €40,000 in lost value.

Or if you put the €50k savings against the mortgage next year, would this bring you down to 90% LTV allowing you to trade up?