How will this apply to negative equity mortgages?

Brendan Burgess

Brendan Burgess

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Here is the wording from the consultation document

3. Residual debt from negative equity mortgages: Credit granted for the purpose of discharging residual debt under a negative equity mortgage is excluded from the calculation of the LTV. The LTV limit will only apply to the loan secured on the new property, before the residual debt is applied. The residual debt which can be exempted only applies if the property sold is a primary dwelling.
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and here is the wording from the definitions


'Loan’ means an amount advanced or a total sum of amounts advanced to a borrower secured on an individual residential property. For the purposes of calculating loan to value only, the definition excludes any residual debt under a negative equity mortgage.
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Is the following example correct?

Mortgage| € 300k
House worth| € 250k
Negative equity |€50k


(Assume I meet the Loan to Income restrictions)

I want to buy a house for €400k

house value|€400k
Max mortgage - 80%|€320k
Add NE|€50k
Total mortgage|€370k
LTV|92.5%

This is good for the lender, NE of €50k have been changed into positive equity of €30k.
 
Hi Brendan,

I follow your calcs and think they do map to the current proposal wording – the press reports thus far typically just state that negative equity mortgages are exempt from the new caps. However, I think people should be cognizant that they are not really as fully ‘exempt’ as that.

Firstly, from your example above – the LTV cap does still apply, but the negative equity portion is excluded. From your calc - does it follow that House Price 400k is funded 370k debt (new + residual) and 30k cash ?

Secondly, people should be clear that negative equity mortgages are not listed under the exemptions in relation to earnings multiple caps. So therefore the 3.5x earnings multiple applies to the €370k in your example above. Which presumably would have been how the banks should always assess affordability in any case.

Again, I think this distinction should be made much clearer to the public rather than having the press give negative equity mortgages an ‘exempt’ label, which I think is a function of how the official document is presented, whereas in reality there is more in the detail.
 
Grimy said:
From your calc - does it follow that House Price 400k is funded 370k debt (new + residual) and 30k cash ?
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Yes.



Secondly, people should be clear that negative equity mortgages are not listed under the exemptions in relation to earnings multiple caps.
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A very good point, and I have edited my original post to reflect this.

This is one of the examples, where the LTV and LTI should be combined in making a lending decision. The guy in my example should be lent a lot less than 3.5 times his income if the combined LTV is going to be 92.5%
 
Here is the actual wording

5. These Regulations shall not apply to:
... a housing loan which replaces another housing loan, and under which the amount advanced under the replacement housing loan does not exceed the monetary amount outstanding to the lender...
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This wording does not exempt Negative Equity mortgages in the way described by the general discussion in the consultation document.

Residual debt from negative equity mortgages: Credit granted for the purpose of discharging residual debt under a negative equity mortgage is excluded from the calculation of the LTV.
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The regulations as drafted limit the total loan in my example, to €300k.
 
5. These Regulations shall not apply to:
... a housing loan which replaces another housing loan, and under which the amount advanced under the replacement housing loan does not exceed the monetary amount outstanding to the lender...

This is the wording used to provide exemption to those switching mortgage from one lender to another.
 
Residual debt from negative equity mortgages: Credit granted for the purpose of discharging residual debt under a negative equity mortgage is excluded from the calculation of the LTV.

The regulations as drafted limit the total loan in my example, to €300k.

- I do not follow your logic here. To me, it is that wording that provides the exemption for the negative equity portion carried over when calculating the relevant LTV when applying the cap. i.e. in your example New House €400k funded €320k new debt, €50k old debt + €30k cash, yes all-in LTV is 92.5%. However when the bank is aggregating up how much lending it has done with reference to the caps, the relevant LTV is 320 / 400 = 80%.
 
Hi Grimy

The discussion document has a long narrative, but the actual proposed regulations are set out at the end. The banks will have to operate according to the regulations, not the narrative.

So it's the definition of "loan" which is part of the regulations, which seems to exclude the negative equity bit.
 
Maybe I haven't had enough coffee yet but that discussion has confused me.
In your example does the buyer not still need to have an €80,000 deposit on a €400,000 house?
Most people who wish to trade up after a number of years in a property use the equity in their property as the deposit for the trading-up house. They have equity because they have paid down capital and/or prices have risen. Under these proposals people wanting to trade up have to save up a 20% deposit in cash as well as servicing their existing mortgage. I think it's almost impossible to do that.
 
Hi Butter

You have had enough coffee so you do understand it correctly.

These guys need €80k cash if they want to trade up.

However, if this exemption was not in place, they would need €130k cash.

Grimy has noted already, that most commentators have missed this point. For example this heading in the Indo is misleading

and the sub-heading

Homeowners in negative equity will not be bound by the Central Bank's new mortgage rules
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However,the substance of the article is correct.

There would be many people with cheap tracker mortgages who have saved up a lot of cash as their repayments are so low.
 
I'm one of those people with a cheap tracker - 0.5% above ECB rate, taken out in 2005. I suspect that many people around my age who borrowed around then have managed to keep their heads above water because of tracker rates.
The last ten years have seen us have monthly childcare bills which started at €750 a month went up to €1950 a month for a couple of years & even now are still €600 a month. We've been lucky to both stay in employment over the years of the recession.

Anyone in a similar situation might have managed to stay afloat helped by a tracker, but also managed to save €80,000? A lot of people who bought in the mid 2000s must be in their 30s & early 40s now - at least that is the cohort of people I know in negative equity. I can't see that there are that many people out there in negative equity with those kind of savings.

The requirement for a 20% deposit will kill any chance they have of moving.
 
Hi Brendan,

I think I needed coffee too as was getting confused here, even though the calcs are pretty straight-forward ! Matbe I could just lay our my understanding so that we are all straight.

1. Sell Existing House -
Residual Debt 50k

2. Buy New House:
Purchase Price 400k
20% Cash Deposit Required 80k
Mortgage on New House 320k

Total New Mortgage = 370k, of which 50k is used to discharge Residual Debt.

So, in effect there is 450k to be funded, which is done through 80k cash & 370k debt ?
 
So, it follows therefore and with reference to your other other posts - when it comes to the negative equity movers, it is simply the amount of cash on hand that you have today which governs in the first instance the house that you can buy. You have 30k you can go for a house worth 150k and so on;
30 - 150
50 - 250
70 - 350

. . . .So in reality the negative equity mortgage holders are pretty much in the same boat as all other borrowers (in this first instance). . . . the negative equity residual irrespective of how large does not matter . . . .

Now at the next stage the 3.5x eanrings multiple is relevant . . so above in order to have 370k total debt, the borrower / s would have to be earning >105k p.a ?
 
So, if you can ultimately are on decent earnings and the mortgage allowable on 3.5x multiple is sizeable even inclusive of the negative equity element, if you have not got significant cash today you are scuppered, with the follow on being -> you need to save, save, save, use alternative borrowings, liquidate everything you got, to raise this first 20% deposit. . . .

While I do not have the stats, thinking of the cohort of potential movers out there, negative equity or not . . this seems like a serious stretch for the vast majority. . .
 
Grimy said:
Hi Brendan,

I think I needed coffee too as was getting confused here, even though the calcs are pretty straight-forward ! Matbe I could just lay our my understanding so that we are all straight.

1. Sell Existing House -
Residual Debt 50k

2. Buy New House:
Purchase Price 400k
20% Cash Deposit Required 80k
Mortgage on New House 320k

Total New Mortgage = 370k, of which 50k is used to discharge Residual Debt.

So, in effect there is 450k to be funded, which is done through 80k cash & 370k debt ?
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Spot on!
 
It's not the new regulations which are stopping you from trading up. It's the fact that you paid so much for your house around 8 years ago, that you do not have any equity.
And this is compounded by the fact that you have since had expensive children which has stopped you from saving the deposit.


Now at the next stage the 3.5x eanrings multiple is relevant . . so above in order to have 370k total debt, the borrower / s would have to be earning >105k p.a ?
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I think that virtually everyone is agreed that the 3.5 times earnings multiple is not excessive. And in these trade up cases, you are talking about people with kids - which means that they have child care costs or only one income.

If you have not been able to save on a very cheap tracker, there is no way you should be taking out a bigger mortgage on a higher interest rate.

Brendan
 
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