# Can pay off negative equity, but should I?



## ipad (23 Aug 2010)

Bought small 2 bed in South Dublin for 600k in 06 which is now for sale as I now want to trade up. Current mortgage is down to 440k but getting offers at around 350k mark which means that I'll need to pay approx 100k before I can sell. Mtg rate is ECB tracker + .5

Wife and I both on good money (combined 200k) in very secure jobs and as well as getting down mortgage to current level, have also amassed savings of 250k, mostly for house move.

Cost of new house around 600k but if we pay off the neg equity on the mortgage we will only have 150k left to go towards buying next house. Stamp duty will also decimate these savings further and banks seem to be only giving 80% LTV.

Because of above and the losses we've already sustained with current home, am wondering if it would be better to hold onto it, use all savings to go towards buying new house, in effect avoid taking the negative equity hit? Could rent it out and while we'd have to contribute a few hundred a month at least it's better than paying out 100k all at once (we've already paid off an additional 160k dead money too). As its on such a good mortgage rate it seems preferable to let the loan run its course or at least sell a few years down the line when mortgage on the new house has been reduced even further.

Trying to adhere to Warren Buffet's maxim of 'Never Lose Money'


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## Mrs Vimes (23 Aug 2010)

Be aware that you may lose your tracker rate if the property ceases to be your principal private residence - check your mortgage documents, it would change your numbers significantly if you were moved onto an investment property rate.
Sybil


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## ipad (23 Aug 2010)

Mrs Vimes said:


> Be aware that you may lose your tracker rate if the property ceases to be your principal private residence - check your mortgage documents, it would change your numbers significantly if you were moved onto an investment property rate.
> Sybil


 
Appreciate that and have factored it in. Even so, not convinced that crystalling 260k loss is preferable.


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## aristotle (23 Aug 2010)

If you keep the existing and buy the new house you will have combined mortgages of nearly 800k (assuming you use all your savings). Even with the high incomes its still 4 times your combined earnings and its probably too much exposure to property.

If you sell the frst house your mortgage will be a more manageable 450k.

There is no completly right or wrong answer. Do you want to keep the first house and become a landlord? If your bank finds out that you are renting it out then they will probably put you onto a higher rate "investment mortgage" - check your T&Cs of the mortgage agreement.

You should consider what might happen if one of you might loose or have reduced income (career break, children, sickness etc) and the effect of a 4-5% increase in interest rates.


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## aristotle (23 Aug 2010)

What ages are you as that might help people give better opinions?

Also, as rental property what do the figures look like on the first property? Monthly rent, monthy mortgage repayments at current tracker rate and possible higher investment rate? How many years left on the term?


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## ipad (23 Aug 2010)

We're in our mid-thirties. There's 26 yrs left on first property - current monthly repayments are 1600, and would comfortably rent for 1300 pm at current rates. Even factoring higher ECB rates in future, we could still more than manage any shortfall as well as the repayments on the 2nd house. 

Also plan to pay off this 2nd mortgage asap and based on current earnings could realistically do this within 8/10 years.
Already have kids and no more planned and as mentioned both jobs are better guaranteed than most in an industry that doesn't suffer in recession.


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## amgd28 (23 Aug 2010)

Rather than looking at the situation as "crystallising a loss", you should also look at the savings you will crystallise in "trading up". 
For example, I would assume that if your place has depreciated by say 40%, then it would be reasonable to expect your new house to have depreciated by 30%-40% from peak also (likely more). In which case, if you had tried to move a couple of years ago, you would be looking at trying to find another 300k+ to make the move. Add in that the stamp duty would have been higher and it looks to me that you will be doing actually quite well in real terms for this trade-up than if you had done it before the market tanked. The overall cost of trading up has decreased.


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## ipad (23 Aug 2010)

amgd28 said:


> Rather than looking at the situation as "crystallising a loss", you should also look at the savings you will crystallise in "trading up".
> For example, I would assume that if your place has depreciated by say 40%, then it would be reasonable to expect your new house to have depreciated by 30%-40% from peak also (likely more). In which case, if you had tried to move a couple of years ago, you would be looking at trying to find another 300k+ to make the move. Add in that the stamp duty would have been higher and it looks to me that you will be doing actually quite well in real terms for this trade-up than if you had done it before the market tanked. The overall cost of trading up has decreased.


 
I agree that the cost of trading up has decreased but the fact that you need to pay 260k for neg equity before you start rather negates this?


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## marshmallow (23 Aug 2010)

Something else to consider. You say your current mortgage is on a good rate ECB &.5 Unlikely you'll get such a good rate or a tracker on the new mortgage so in principal I would agree with your strategy of using your savings towards the new home and paying this new mortgage (the one with higher costing finance) first rather than paying off the lower rate finance. 
The main risk is your exposure to property and how prices might go in the longterm


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## Howitzer (23 Aug 2010)

Combined salary 200K. Combined mortages would be 1040K. In the current environment banks aren't taking rental income into account in these scenarios. A bank may not lend you those multiples.

Assuming they do it boils down to where you think property prices are going in the short to medium term. 

If you feel they're going to continue falling then you aren't crytalising a loss, you're placing a limit on the loss.
If you feel they're going to rise within a short period of time then you should hold on.
If you feel they're going to continue falling for the short term but start rising in the medium term, then I'd consider selling now and buying a proper investment property when you feel the market has bottomed out. 

Take into account that there is a limited market for family homes as rental properties. There is more or less an upper bound on rents so a 600K home is highly unlikely to achieve the same rent as 2 300K houses. Tenants do not respect the property they live in, your fancy floor/worktops may depreciate quite considerably whilst you wait for the market to recover.

If you paid 600K for the property and it's worth 400K today you'll need a 50% increase in the market to break even. How long are you prepared to wait for that to happen? If it drops in value to 300K you'll need a 100% increase. You could be waiting a long time and have very little flexability during that period with a million euro mortgage hanging over you.


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## Maynooth (23 Aug 2010)

You have just lost 60K per annum on property and you want to buy even more?


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## ipad (23 Aug 2010)

Maynooth said:


> You have just lost 60K per annum on property and you want to buy even more?


 
Thats sortof my point. I haven't actually lost anything unless I sell, have I?


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## TRipley (24 Aug 2010)

I think it's easy to get philosophical at this point over the question your asking - if your initial 600k property was now worth 700k instead of 350k - would you have made as much effort to get the mortgage to 440k ? 

It could be argued that the overpayments (I'm only assuming you made these) to your mortgage to get to 440k was 'a loss' as this expendible income could have been used to invest elsewhere (or buy a 4 week round the world holiday and a porsche, give to charity or whatever floats your boat - you get my point).

As someone said earlier - there is generally no right and wrong once you have the basic necessities covered and you should use money as a facilitator to attaining your goals rather than vice-versa.


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## ipad (24 Aug 2010)

Howitzer said:


> Combined salary 200K. Combined mortages would be 1040K. In the current environment banks aren't taking rental income into account in these scenarios. A bank may not lend you those multiples.
> 
> Assuming they do it boils down to where you think property prices are going in the short to medium term.
> 
> ...


 
My intention isn't to wait for prices to rise, more to let the mortgage run down and pay it off slowly rather than take a huge hit upfront. I suppose I'm justifying it because of the low interest rates whereas like another poster says if I use my cash towards my new mortgage I'll pay less interest overall.
If I can get the new mortgage down reasonably quickly (already demonstrated this is possible with the current one) then I'll turn my attentions to the old one and either sell and take the hit then (when I don't 'need' the money for something else) or else keep and at least there will be bricks and mortar at the end of it?

The overall risk to property is large yes, but I'm not looking to make money at this point, more to avoid losing it.


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## ipad (24 Aug 2010)

TRipley said:


> I think it's easy to get philosophical at this point over the question your asking - if your initial 600k property was now worth 700k instead of 350k - would you have made as much effort to get the mortgage to 440k ?
> 
> It could be argued that the overpayments (I'm only assuming you made these) to your mortgage to get to 440k was 'a loss' as this expendible income could have been used to invest elsewhere (or buy a 4 week round the world holiday and a porsche, give to charity or whatever floats your boat - you get my point).
> 
> As someone said earlier - there is generally no right and wrong once you have the basic necessities covered and you should use money as a facilitator to attaining your goals rather than vice-versa.


 
Exactly Tripley, I kind of feel I've already 'wasted' a huge amount of real money on the property and if I have to pay off even more to sell it, leaving me short for my new property, that money is well and truly gone. Whereas if I keep it and hang on until the loan is paid off (by me and various tenants) then at least there's something at the end of it.


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## aristotle (24 Aug 2010)

ipad said:


> Exactly Tripley, I kind of feel I've already 'wasted' a huge amount of real money on the property and if I have to pay off even more to sell it, leaving me short for my new property, that money is well and truly gone. Whereas if I keep it and hang on until the loan is paid off (by me and various tenants) then at least there's something at the end of it.


 
But you have to consider the downsides to that approach to:

1) Being a landlord and the hassles of it. Also you will have to pay capital gains tax of some sort when you eventually sell.
2) You will have a big exposure to property and 790k-1m in mortgages depending on how much of your savings you use.
3) What if you cannot rent out the property for a few months
4) Will having the large overall mortgage limit your choices in the future e.g. career break.

It sounds like you have made your decision to keep the property and rent it?


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## ipad (24 Aug 2010)

Highly unlikely there'll be CGT payable as doubt it will go up again to 600k-odd
Know being a landlord is no bed of roses but the property is in a very sought-after location and should rent easily. 
Decision isn't fully made but being very seriously considered and wanted to get people's general opinions on it. After all, everyone keeps saying that negative equity isn't a problem unless you want to sell!


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## aristotle (24 Aug 2010)

Have you done any calculations for renting it out?

Assuming an average of 10 or 11 months rent per year and if you take a guess on when the property price will meet the remaining mortgage then how much will it cost you to rent it over that period?

Take into account property tax, tax payable on rent, maintenance, water charges, etc etc. You can just guess the property tax and water charges, I would say a total of 1k might be about right.


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## TRipley (24 Aug 2010)

If it was me I'd be inclined to stay put for a couple of years - you overpaid for the property but then it also has very cheap financing and if you hadn't bought you'd be renting somewhere else anyway- e1660 per month services your mortgage of 440k at 1.5% but only ca. 290k at 5% over the same 26yr period. Some would argue you could knock 25% off the original purchase price just because you have a low tracker now.

I don't think ecb rates will rise until Summer 2012 over which time you can knock another 100k off the mortgage. If you do rent now - you probably won't have much CGT to pay on exit but you will have to pay annual tax on rental income of 15.6k per annum. Also - you won't have that much allowable interest to write-off that income for a couple of years - only 5k p.a. so you will have an annual tax bill of 4-5k p.a. You are correct in that you most likely won't have any day-to-day management issues especially if you go via a mgmt company.

It will be easier to stomach selling your apt in a couple of years when the mortgage is lower and even if you do keep it to rent you'll have a lot less debt swinging about. Having large amounts of debt can play on your mind even if you can comfortably service it.


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## Howitzer (24 Aug 2010)

ipad said:


> My intention isn't to wait for prices to rise, more to let the mortgage run down and pay it off slowly rather than take a huge hit upfront. I suppose I'm justifying it because of the low interest rates whereas like another poster says if I use my cash towards my new mortgage I'll pay less interest overall.
> If I can get the new mortgage down reasonably quickly (already demonstrated this is possible with the current one) then I'll turn my attentions to the old one and either sell and take the hit then (when I don't 'need' the money for something else) or else keep and at least there will be bricks and mortar at the end of it?


It certainly sounds like you've already made up your mind. The problem with debating a point with anyone of reasonable intelligence is that once they've made up their mind they can make a case to justify anything.


ipad said:


> The overall risk to property is large yes, but I'm not looking to make money at this point, more to avoid losing it.


Ok, so how do the numbers stack up?

Forget about the price you paid and the price you're going to achieve. That money's gone. It may be residing in your savings account at the moment but in reality it's gone.

If your aim is to avoid losing money then look at situation as of today. Say you had no mortgage and 100K less in savings what would you do, would you buy a home for your family AND the home you're currently living in as an investment property?

Would the home stack up as an investment property in it's own right. You're paying ECB +.5%. What rate would you be paying after changing to an investor rate? What will that cost you in interest on an annual basis? What rent can you reasonably achieve? In a blue sky scenario, assuming no taxes, rental voids or maintenance costs does the rent exceed the interest?

If not then it's not a good investment. In fact it's a terrible investment as you WOULD be losing money, just on a more gradual basis. Assuming no increase or decrease in prices (or a decrease and then an increase maybe) over the term of the mortgage, then the bricks and mortar will have been fully paid for by you. By putting the money squarely into a savings account you would have achieved the same effect, except a savings account would have paid compounded interest.

Your plan is predicated on either the housing market recovering to the point where you haven't lost out, or you yourself paying off the mortage over a long period and fooling yourself over that period that you haven't made a loss, paying off the loss you have made in smaller, easier to digest, chunks. It's much easier to justify to yourself chipping in E500 a month rather than swallowing the whole loss up front.


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## ipad (24 Aug 2010)

Unfortunately moving now is a necessity as 2 lively kids of 2 years old in a small two-bed with no garden isn't a runner anymore. In addition we both work from home so more space is essential and also with our level of salaries we feel we can justify a bigger house - the plan was never to be in the 2-bed forever (yes, our timing sucked as did many others')
Definitely prefer having a tax bill of 4/5k pa rather than pay out a whopping 100k now - again 100k less to go towards new property of which mortage will be a higher rate. I suppose we could consider this a 'negative equity mortgage ' of sorts as I'm trying to put taking the 100k hit on hold until we get our ultimate living arrangements sorted.


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## Complainer (24 Aug 2010)

Howitzer said:
			
		

> Would the home stack up as an investment property in it's own right. You're paying ECB +.5%. What rate would you be paying after changing to an investor rate? What will that cost you in interest on an annual basis? What rent can you reasonably achieve? In a blue sky scenario, assuming no taxes, rental voids or maintenance costs does the rent exceed the interest?
> 
> If not then it's not a good investment. In fact it's a terrible investment as you WOULD be losing money, just on a more gradual basis.


This is the key issue. Remember the old accounting principal of sunken costs. It really doesn't matter how you got here. What matters now is where you go from here. If it doesn't stand up as an investment, get out.


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## aristotle (24 Aug 2010)

Complainer said:


> This is the key issue. Remember the old accounting principal of sunken costs. It really doesn't matter how you got here. What matters now is where you go from here. If it doesn't stand up as an investment, get out.


 
Thats true but the OP is correct too in taking into account that the alternative to a "bad" investment might be an even worse option of taking an immediate 100k hit.


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## Howitzer (24 Aug 2010)

ipad said:


> Definitely prefer having a tax bill of 4/5k pa rather than pay out a whopping 100k now


More bit sized chunks?


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## TRipley (24 Aug 2010)

purely as an investment it is viable - rental yield is 4.5% and cost of financing is only 1.5%


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## aristotle (24 Aug 2010)

TRipley said:


> purely as an investment it is viable - rental yield is 4.5% and cost of financing is only 1.5%


 
But that cost of financing is the current rate, the OP would probably have to move to some higher "investment" rate. Interest rates can only go north so that would have to be considered too.


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## Howitzer (24 Aug 2010)

TRipley said:


> purely as an investment it is viable - *rental yield is 4.5%* and cost of financing is only 1.5%


Where do you get that from?


ipad said:


> We're in our mid-thirties. There's 26 yrs left on first property - current monthly repayments are 1600, and would comfortably rent for 1300 pm at current rates.


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## ipad (24 Aug 2010)

Howitzer said:


> More bit sized chunks?


 
Ultimately yes. If I use that100k towards the new house now, I will need less of a mortgage, and as this new mortgage will be perhaps double the interest rate, it 'seems' preferable to use it in this way. My priority is to get my next house sorted, pay lump sums into the higher costing finance and get that down to a manageable level before I ultimately decide what to do with the old house. To be honest, I'm not looking at it as in investment as such, just trying to avoid taking the hit at this point. 

I've tried crunching the numbers and given the lower interest rate it does seem to stack up on paper, but without knowing if prices go even lower I really can't say. If we stay put, any savings I keep building up will be negated by the price drop so there's no winning really.


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## TRipley (24 Aug 2010)

the mortgage most likely will stay at the same rate - this is specific to whatever terms the OP has with their bank with obviously - yes of course interest rates can go up but then as an investment it should be reviewed again then, right now it's OK.


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## aristotle (24 Aug 2010)

Howitzer said:


> Where do you get that from?


 
Rental yield= (1,600 * 12 months) /440,000 remaining mortgage?


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## Howitzer (24 Aug 2010)

1600 isn't the expected rent - it's the current mortgage @ ECB +0.5%.


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## aristotle (24 Aug 2010)

TRipley said:


> the mortgage most likely will stay at the same rate - this is specific to whatever terms the OP has with their bank with obviously - yes of course interest rates can go up but then as an investment it should be reviewed again then, right now it's OK.


 
It will stay at the same rate if you dont tell the bank or if they dont find out. Given that the bank probably has an insurable interest in the property then once the OP takes out nwe house insurance to cover it as an investment property then will the bank find out that way?

I think the OP has to assume that they will be moved to a higher investment rate.


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## TRipley (24 Aug 2010)

no rental yield is the annual rental income (1300X12=15600) / property value (350k) = 4.5%


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## aristotle (24 Aug 2010)

Howitzer said:


> 1600 isn't the expected rent - it's the current mortgage @ ECB +0.5%.


 
You're right, the yeild is more like 3.5% assuming its rented out 100% of the time.

EDIT: above calc might be wrong.


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## Howitzer (24 Aug 2010)

ipad said:


> If we stay put, any savings I keep building up will be negated by the price drop so there's no winning really.


And doubling your property exposure doesn't have the same effect?


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## TRipley (24 Aug 2010)

just because you tell the bank it's an investment property doesn't mean the bank will go to a investment rate. The yield is 4.5% not 3.5%.


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## Howitzer (24 Aug 2010)

TRipley said:


> no rental yield is the annual rental income (1300X12=15600) / property value (350k) = 4.5%


Urghh, the "value" of 350K makes no odds to the OP as they have an outsatnding mortgage of 440K. What year is this, 2006? A big sense of deja vu over these rental yield calcs.


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## aristotle (24 Aug 2010)

TRipley said:


> just because you tell the bank it's an investment property doesn't mean the bank will go to a investment rate. The yield is 4.5% not 3.5%.


 
So the banks will just ignore the T&C's in the mortgage contracts? I doubt the bank will be doing people any favours like that.


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## ipad (24 Aug 2010)

Howitzer said:


> And doubling your property exposure doesn't have the same effect?


 
I know. It's nervewracking either way, because if sell the property, take the 100k hit now, get a new mortgage on another house of 600k and prices drop again, I've lost again. Only difference is I'm living in the property that's ultimately my home so by rights I shouldnt care but I'm paying double the interest rate on that 100k that was only costing me 1.5 or whatever the investor rate will be. 
I don't know the answer and I'm not saying its the right option, but it's the one that feels right just now.


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## TRipley (24 Aug 2010)

yes let's not get into a yield calculation debate - normally the property value is used but there are lots of other ways of expressing it.....

it's up to the T&Cs obviously but everyone seems to think here that a bank will automatically change to an investment rate - they won't


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## aristotle (24 Aug 2010)

How do you feel about renting out the property and just renting somewhere else? At least you will keep your savings and property but won't have a huge mortgage?


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## ipad (24 Aug 2010)

aristotle said:


> How do you feel about renting out the property and just renting somewhere else? At least you will keep your savings and property but won't have a huge mortgage?


 
Yes, we considered this very seriously but prices in our area for a decent house in good upkeep range from about 3k to 4k per month, so you'd be paying the equivalent of a mortgage from year to year anyway. Also, with the kids and the working from home we do need the security of knowing where we'll be from year to year. And a lot of people don't consider this, but we found on enquiring that many landlords of nicer properties don't want to take pets OR families with small kids, which is understandable but a huge drawback for potential renters with both.


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## TRipley (24 Aug 2010)

ipad - can I ask what kind of area you work in - I like your setup working from home - do you both work together?


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## ipad (24 Aug 2010)

Yes, we're in the same business (an area of entertainment) but don't work together as such.


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## aristotle (24 Aug 2010)

Lets guess! Doctors living in D4, Howth, or Killieny ?


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## ipad (24 Aug 2010)

So what's the overall verdict? Are we mad? Or is there any tiny bit of sense in there at all?


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## aristotle (24 Aug 2010)

I think you have got both sides of the arguements, and some other options too, so its only you who can decide really.


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## ipad (24 Aug 2010)

Thanks all for input, going to crunch the numbers this evening and see how it all stacks up.


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