# Keep Negative equity or Savings



## burgh (26 Oct 2010)

Hi

  Mortgage =300K with 32 years left 
  Current estimated Worth =250K 
  Savings=130K
  Single person.
  Have a job and can pay the Mortgage 
  Ok rate on the mortgage 1/2 tracker 1/2 variable

  My own personal view is that the house will never be worth the same in real terms again and not in 5 years time.

  Goal= Location wise I would like to move to a nicer area.

  My question is would it be foolish to sell now spend up to 50 or 70 K getting rid of negative equity? Or should I ride it out? Is there a standard wisdom that I am missing on this situation?

  I would appreciate your opinions.

  [FONT=&quot]thks[/FONT]


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## aristotle (26 Oct 2010)

Taking a 50-70k hit just to move to a nicer area sounds like a bad move. If you want to live somewhere else you can always rent. You would have to rent out your current place and do the figures to see if its worth it. You would probably have to back it each month but you can see this property as part of your pension plan perhaps.

It may take 5 or even 10 years for the value of the property to match the remaining mortgage. I would wait it out and you will probably be able to sell it in time.

Having 130k in cash gives you options and a very good financial cushion.


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## kildon (26 Oct 2010)

A friend of mine is in a similar situation to the original poster. They are recently married, trying for a child, have 110k in savings but live in a duplex with negative equity of 90k and they will have the issue of going up and down a stairs everytime with kids and buggies and everything else that goes with rearing children. They want to live in a house with a back garden and are trying to decide on the following (a) clear negative equity and start again, (b) rent out their duplex and rent a house for themselves and fund the difference between rent coming in and rent going out or (c) buy a new house using their savings

would be interested to hear what other people have done or are thinking of doing in similar situations


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## jambo.ie (27 Oct 2010)

aristotle said:


> It may take 5 or even 10 years for the value of the property to match the remaining mortgage. I would wait it out and you will probably be able to sell it in time.


Meanwhile you waste 5 to 10 years of interest payments and the hassle of managing tenants. I also think that your timeframe is optimistic. If the OP wants to move then there is no point holding onto this contingent liability.


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## PiedPiper (27 Oct 2010)

You dont make a loss till you sell.
Will you ever be in a position to buy again.
I would say hang on to it, if its in a good rentable area.


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## Macstuff (27 Oct 2010)

Hi OP
I am in a similiar situation. 
I've just recently gone into negative equity, am single and am living in an area that I'd ideally like to move out of at some stage. However, I don't have any savings, but my amount of negative equity is low (about 5k).

I've decided to stay put and ride it out. 
My main reason for doing this is that I'm a single male with no kids on the horizon. For me there would be a push to move would come if I had kids and therefore needed a bigger house and or access to better schools. 
If I was you I would continue to save a nest egg and hope that the market will take care of you negative equity over time as you don't have any "real" need to move at this point.


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## niceoneted (27 Oct 2010)

I'd be looking at what sort of price property is, where you want to live. For example if you sold, then used savings to cover neg equity and then remainder of savings for deposit, would the new mortgage be smaller than the exisiting one?


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## aristotle (27 Oct 2010)

jambo.ie said:


> Meanwhile you waste 5 to 10 years of interest payments and the hassle of managing tenants. I also think that your timeframe is optimistic. If the OP wants to move then there is no point holding onto this contingent liability.


 
Well if you can rent it out and the rent covers the interest portion of the mortgage you can just view having to pay the capital part as an a investment. The house becomes part of a long term investment, it will eventually sell.

I think it is preferable to loosing such a chunk of money just to move to some other location. You can still move to some other location if you want by renting.


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## shnaek (27 Oct 2010)

Another thing to consider is, if your house goes up in value, so too will the other house that you are considering buying.


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## jambo.ie (27 Oct 2010)

aristotle said:


> Well if you can rent it out and the rent covers the interest portion of the mortgage you can just view having to pay the capital part as an a investment. The house becomes part of a long term investment, it will eventually sell.
> 
> I think it is preferable to loosing such a chunk of money just to move to some other location. You can still move to some other location if you want by renting.


The money is already lost, ignoring it and carrying on regardless does not diminish the loss and in many cases will exacerbate it. The rent will not likely cover the mortgage interest, if it would then the property would not be in negative equity. Even if it did, only 75% of the rent can be offset against interest for tax purposes. You also have the hassle of managing the cash flow. It's a very poor investment in the medium to long term.


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## burgh (27 Oct 2010)

Hi Shnaek
can you explain the implications of your comment? I am not sure if you are saying this is a good reason to sell or not.


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## aristotle (27 Oct 2010)

jambo.ie said:


> The money is already lost, ignoring it and carrying on regardless does not diminish the loss and in many cases will exacerbate it. The rent will not likely cover the mortgage interest, if it would then the property would not be in negative equity. Even if it did, only 75% of the rent can be offset against interest for tax purposes. You also have the hassle of managing the cash flow. It's a very poor investment in the medium to long term.


 
Ok we don't know if the rent will cover the interest, so maybe the OP can provide the numbers?

When you say "The rent will not likely cover the mortgage interest, if it would then the property would not be in negative equity" - what do you mean? What is the relationship between negative equity and mortgage interest? The market price is independent of the mortgage or mortgage interest.


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## jambo.ie (27 Oct 2010)

aristotle said:


> When you say "The rent will not likely cover the mortgage interest, if it would then the property would not be in negative equity" - what do you mean? What is the relationship between negative equity and mortgage interest? The market price is independent of the mortgage or mortgage interest.


If rental yields were better than standard variable rates then you would expect that the property would be attractive for an investor and the property would break even at least (i.e. cover the mortgage in a sale). Given that the OP is on a half tracker it's possible that the rent would cover the interest payment, but tax would be due on any rent above 75% of the interest payment. You also have the hassle of managing cash flow and tenants for potentially a decade or more with little or no return. It's a load of hassle for nothing.


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## aristotle (27 Oct 2010)

Rental yields are in many cases better that standard variable rates already, the reason investors are so scarce is due to financing and the general loss of confidence. But there is no relationship between someones outstanding mortgage and a sale price.

Managing tenants and cashflow can be hassle or it can be a breeze (on average it will be somewhere in between). But you seem to miss the fact that after 5-10-15 years of doing so you still have an asset that hopefully will be valued at more than the outstanding mortgage.

It's up to the OP do decide what route to go down.


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## jambo.ie (27 Oct 2010)

aristotle said:


> But you seem to miss the fact that after 5-10-15 years of doing so you still have an asset that hopefully will be valued at more than the outstanding mortgage.
> 
> It's up to the OP do decide what route to go down.


15 years is a long time to be waiting around for breakeven, especially if they already want to move now. It seems to be a similar strategy to buying a car and pretending it's never lost it's value by waiting until it's a classic to sell, meanwhile storing and maintaining it at considerable cost.

Renting will be the only alternative option in the medium term as the OP won't get any more credit.


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## aristotle (27 Oct 2010)

jambo.ie said:


> 15 years is a long time to be waiting around for breakeven, especially if they already want to move now. It seems to be a similar strategy to buying a car and pretending it's never lost it's value by waiting until it's a classic to sell, meanwhile storing and maintaining it at considerable cost.
> 
> Renting will be the only alternative option in the medium term as the OP won't get any more credit.


 
No one knows the timeframe involved to breakeven.

There is nothing wrong with renting either.


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## ipad (27 Oct 2010)

I posted a similar query a while back and am still grappling with the decision even though I've since gone sale agreed. My prob is I have to pay out a whopping 100k in neg equity and cant help thinking that if I kept this money and continued to save & rent out my existing property, i might well be able to buy a bigger prop outright in a few years with the way prices are going. Also my indecision compounded by an ECB + .5 tracker, which is the cheapest I'll ever be able to borrow so not sure if I should just let existing mortgage run down and be paid for by someone else


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## burgh (27 Oct 2010)

I suspect that it might be all about the view you take on the future. Some people like jambo.ie think the money is lost already and that there is no point losing more others like aristotle believe the house will make back its money in the end. 

  The rental could be about 1000 per month at the moment. The repayments are about 1200.

  I guess what I am looking out for is a train of though that would allow a decision to be made given the various different scenarios that  could happen with out making an obvious financial mistake.

  Bad Scenario  - Lower rents, higher interest rates and very slow recovery i.e. 20+ years. 

  Good Scenario - Rents stabilise, rates not so high and fairly fast recovery i.e. 5-10 years.


  [FONT=&quot]If I wanted to move in either scenario which is the best thing to to Sell or hold and why.[/FONT]


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## aristotle (27 Oct 2010)

You just need to work out the numbers on renting it out. How much rent, what tax you will pay, what fees incurred as a landlord, try the numbers on having it rented out 9 months of the year or 12 months of the year etc.

What do the numbers look like it interest rates go to an ECB rate of 4-5%. Will you be forced onto an investment mortgage by your bank?

A train of tought it fine, but you really need to crack the numbers in detail.


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## Pope John 11 (27 Oct 2010)

burgh said:


> Goal= Location wise I would like to move to a nicer area. [FONT=&quot]thks[/FONT]





But if you sell your €300K house & only get €250K

& you buy a house, previously worth €400K for €325 in a good location,

then, thumbs up you win, negative equity cancelled out.

The question is how soon can you top up your savings after been hit with the negative equity sale of your house, enough savings for a deposit for your new house, bearing in mind the banks tight stress testing criteria.


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## jambo.ie (28 Oct 2010)

Pope John 11 said:


> But if you sell your €300K house & only get €250K


It's not a 300k house, it's a 250k house, in 6 months time it might be a 225k house. Anchoring your perceptions to bubble values will give you a distorted view of the market.


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## aristotle (28 Oct 2010)

Pope John 11 said:


> But if you sell your €300K house & only get €250K
> 
> & you buy a house, previously worth €400K for €325 in a good location,
> 
> then, thumbs up you win, negative equity cancelled out.


 
It doesn't work that way. If you sell the a house with a 300k mortgage remaining on it for 250k then you have to pay the 50k difference yourself.

Then you buy the 325k house with a new loan and\or your savings. The previous price of the house at 400k is irrelevant.


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## dandecombine (1 Nov 2010)

Interesting and thought-provoking thread.  I'm in a very similar position.  Savings are enough to deal with negative equity redemption on sale of a house (probably 50-70K) and income is sufficient to get a mortgage on a new house, never affordable in 2006, but affordable now.

But I can't shake the feeling that I'm repeating the Irish obsession with owning...

That hit in negative equity could, if spread out, rent a hella-nice place for a few years.

On a quasi-related point, I note that revenue don't allow (the site says) expenses against rental income on "uneconomic rents".  Does anyone know if this covers situations where, say, the mortgage out is 1500 and the rental in is 900?


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## Ailesbury (3 Nov 2010)

Sounds like you may want to consider first whether you really want to move. Your equity gap could be worse. Some considerations; if you pay off some of the mortgage pay the variable piece first not the tracker, renting sounds easier than it is, if you rent you may be liable for clawback of stamp duty, this could be significant this depends in the time you bought the property, check out revenue.ie, prices may fall further and the quity gap is likely to increase, and the cost of you're mortgage is likely to increase. If you plan to move eventually if you can sell the house factor in further proce reductions on both sides, if the price of the house you buy is higher, you might get an advantage, but beware of catching a falling knife, its safer to buy on the way up than on the way down.


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