# Negative Equity Mortgage - pay off or save??



## EmDilemma (16 Mar 2016)

Hi Brendan and anyone!

I'd like some advice on this situation.

We bought a one bed in 2006. 
Cost 365.
Ten years later we have 266,000 left on mortgage.
Fixed at 3.8 for another few years.
22 year term.

Our child is now 2 years old.
We need to move.

So accidental/reluctant landlord situation.
We have reduced the payments on our mortgage back to our original term as we had been overpaying it by a few hundred every month.
We are now paying 1400 a month.
Renting a 3 bed house in our area will cost 1900 to 2000 a month.

We have 45,000 in savings.

We hope to buy again down the line, in 5 to 10 years or so.

We need 20% deposit for a house in the area.

We need approx 100,000 for this deposit.

Our saving ability will drop considerably when we have to rent and rent.

But we will hope to save approx 800 a month (we think).

I may have provided too much info above or not enough but my bottom line question is:

Do we put our savings off the neg equity mortgage OR do we keep saving for the deposit on the future home mortgage.

It seems to me that there is no point putting it off the neg equity mortgage as then we will have no savings and have to start the 20% deposit savings again?

The apartment is prob worth about 190,000 or so now.
We think we would be better holding on to it for the next 10 or 20 years as it may give back down the line in either rent or as a sale. At the moment it is a big loss both in terms of loss in value obviously but also in that the rent we will receive leaves a big gap on the mortgage repayment.

What do you think?

Thank- you!


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## mro (16 Mar 2016)

Would you think about selling now and getting a negative equity mover mortgage. You dont need a 20% deposit for those?


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## EmDilemma (16 Mar 2016)

mro said:


> Would you think about selling now and getting a negative equity mover mortgage. You dont need a 20% deposit for those?


Thanks Mro.
I don't think we'd get the mortgage we'd need for the location we hope to buy in at the moment.......


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## Brendan Burgess (16 Mar 2016)

Apartment worth: €190k
Mortgage: €266k
Negative equity: €76k 

Savings: €45k

fixed "for another few years" at 3.8%

Want to buy a house for €500k - is that right? 

*Questions *
What are your salaries? 
Who is your lender? 
When does the fixed rate expire? 
Does your mortgage contract allow you to overpay during the fixed rate term without penalty?
Does your original contract entitle you to a tracker when the fixed rate expires? ( Unlikely, but check.)


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## EmDilemma (16 Mar 2016)

Thanks Brendan.

Our fixed rate expires first quarter of 2017.
Yes we want to buy for 500k

Salaries: husband 80k and me 30k
AIB finance is lender
Yes we have been able to overpay before without penalty (although like pulling teeth getting confirmation!)
No, no tracker ......

Thanks!


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## Brendan Burgess (16 Mar 2016)

Ok, with salaries of €110k, you should be able to borrow around €400k 

To buy a house for €500k, you will need 

1) A deposit of 10% or €50k - which you almost have.

2) A mortgage of €526k
Purchase price, less deposit : €450k
Negative equity: €76k


So that is not achievable. 

Could you buy a house for €400k and trade up after a few years? 

Purchase price, less deposit: €350k
Add negative equity: €76k
Total: €426k

*As you are in negative equity, the Central Bank guidelines do not apply to you *

The paradox is that it will be easier for you to get a mortgage while you are in negative equity. 

It makes good financial sense to pay down an expensive loan with your savings, but the CB rules mean that you should not do this. 

Also, AIB will want you to have 10% of the purchase price of the house, so you need to keep your savings. 

You will see how the AIB NE mortgage works here: http://www.askaboutmoney.com/thread...tive-equity-and-tracker-mover-product.187831/

*I don't think that moving out now and renting is a good idea *
You might never be able to afford a house as renting a house is so much more expensive than renting money.

Ask AIB what they will lend you now. See if they will transfer the fixed rate mortgage to a new house. They probably will. 

Trade up to what you can afford with a view to trading up to what you want after a few years.


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## EmDilemma (16 Mar 2016)

Thanks for this.

I'm going to print it and ponder.

I have a fear of getting a new mortgage now.

Just think it' may spiral down into neg equity again and we'll be further up the creek, than we already are....


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## Joe_90 (16 Mar 2016)

I would not be so quick to write of the option of looking to purchase a €400k.

How much rent would you get for the apartment.  Repayments of €1,400 per month, only 75% of interest is allowable, PRTB, insurance, repairs, tenants who don't pay, letting agents fees. 50% tax on any surplus. Could be 300-400 per month to sub that plus the rent of your house.


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## Sarenco (16 Mar 2016)

The fact that 25% of interest payments are no longer deductible for income tax purposes is particularly harsh on accidental/reluctant landlords in EmDilemma's position.


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## EmDilemma (18 Mar 2016)

Well, I/we hadn't considered getting an intermediate mortgage - getting a mortgage now on a house we can afford with the view to trading up in a few years. 

The whole notion of 'trading up' was a complete disaster on our first mortgage, so it seems like a bit of a fiction now. And if there is another mega recession in the next ten years we'd never get back on track with a second negative equity mortgage disaster.

I had just thought, rent, save and get the big deposit necessary for the finale mortgage - the mortgage for the house we want to ultimately end up in.

The idea of getting a mortgage now for an intermediate house.......but I'm beginning to think of it now. 

I would love to sell the apartment and say goodbye to it.  I do not want to be a landlord - dealing with all the hassle and expense and potentially getting tenants that stop paying and we can't shift. Being a parent now I would view that as a direct attack on my child and his future.

But if we get hit twice with a second negative equity mortgage - we will NEVER get back on track. Life isn't long enough to weather two negative equity disasters!!!!!!

The plan was to be a tenant - yes it would cost a fortune but the mortgage risk isn't there and we could slowly work up to the big deposit....  

But then, if the trade up does work, renting instead would be a massive waste of money..........


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## Brendan Burgess (18 Mar 2016)

The point is that you are in an unsuitable house now. 

Trading up allows you to move to a more suitable house, but not your ideal house.  But you should not trade up to an unsuitable house either. 

You will still be in negative equity, but your loan will be lower and you should be able to eliminate the negative equity quicker. 

We don't speculate about house prices on askaboutmoney. However, if you think that house prices will fall, then you should rent until you believe that they are about to start rising again. However, it's just not possible to time the market. 

There is uncertainty, so there is risk in whatever choice you make.  As it's so much cheaper to rent money than to rent property, this seems to me to be the better option. 

Brendan


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## EmDilemma (18 Mar 2016)

Yes the bottom line is we have to move. 

Thanks Brendan. I'll see what the bank would consider lending and decide from there


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## EmDilemma (31 Mar 2016)

Hi Brendan,

Could I ask you - how does a negative equity mover mortgage work? We have a meeting with the bank scheduled but just wonder about the mechanics of it = does the bank take over the sale of the apartment or do we do that or how does it work?

Thank-you!


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## Brendan Burgess (31 Mar 2016)

1) You sell your apartment yourself  - you will be left with a shortfall
2) When you buy the new house, they issue you with a mortgage for the purchase of the house and add the shortfall from the sale 

Brendan


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## EmDilemma (31 Mar 2016)

Thanks for that!


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## Gerard123 (31 Mar 2016)

Broadly agree with much of the comments above by Brendan.  Though I think you need to be very cautious here and not 'dig a hole'.  Appreciate that is the basis of your queries so you are clearly doing the right thing in seeking advice.

Agree completely, it does not make financial sense to rent a house.  It does not improve your situation and if anything I believe that it will become more, not less, difficult to buy in 5-10 years based on your facts.

Is it practical/does it make sense to buy another intermediate house?  I understand the logic, pros and cons.  Reality is a lot of people did this, the so called 'starter home/apartment' and it didn't work out.   I would advise against another intermediate house based on the facts here.  Much of your current funds will be depleted in 5-10 years, and it could well be near impossible to move again.  Also you don't indicate your ages, guessing you are mid 30s (as you bought apt in 2006).   A key advantage you have now is a healthy deposit so I would use it wisely, well done on saving by the way!

Re your salaries, take home pay, etc, and given you have a child, I think you are being overly optimistic regarding what rent and savings you could make per month.  Rent 1,900/2,000 plus savings 800 per month??  That equals 33k/34k per year.  Given current salaries your net combined take home pay is somewhere around 76k/77k per year.  You are suggesting setting aside 43-45% of your net pay for house purposes (33k/76k).  Have you considered childcare, other costs, etc?  Additional children perhaps?  How secure are the jobs, salaries??  May well be that with tightening the purse strings you could do it for a year or two but at some point the pressure would come on.

Re the apt, don't forget that the fixed rate of 3.8% may be below the banks standard variable rate, if the latter was, say, 4.5% your monthly repayments would increase by around 200 per month once you're out of the fixed period to allow you pay your existing apt mortgage within the time period of 22 years.

From a financial viewpoint (indicative figures only provided as an example):

1 - Say the Bank did allow a negative equity mortgage and using Brendan's figure of 526k, ie also sell the apt. Over 25 years at 4.5% it would cost about 2,925 per month.  This would take almost half of your combined take home pay to fund.  Add in other costs with owning a house (insurance, taxes, repairs, etc) seems to me that this is a stretch too far, particularly over the longer term.  (Extending the mortgage to 30 years would still cost 2,700 per month, so I don't think I would do that).  Bank are unlikely to do this anyway.

2 - Same facts as 1 above, except you buy a house costing 400k not 500k, so borrow 426k.  Monthly cost 2,370 @4.5% over 25 years (lowers the monthly cost by around 550).  This reduces the % of your incomes to around 37% of your take home income for the house, this is more in line with suggested/recommended levels and is probably a more sustainable figure.  Could you lower your expectations on the house you needed a little? This would still take persuasion of the Bank though it could be more achievable. You seem to have a strong track record.

3 - Lets say you kept the apt and rented it.  I assumed 1,000 per month in rent (purely for illustration purposes).  Keeping the existing mortgages, allowing for taxes, repairs, etc, I calculate you would need to fund the apt mortgage to the tune of 10-12k per year.  The majority of this is the additional mortgage payments over and above the rent, also allows one months vacancy per year, modest repairs and bills.  Based on the numbers, keeping the apt is certainly not an option if you want to buy from an affordability viewpoint.  Also seems that you have little chance of saving 800 per month if you rent at 1,900/2,0 per month and also need to fund the rented apt by 800-1,000 per month. Any money saved would simply go to the apt mortgage/costs (These are fairly realistic figures by the way, could dispute 100-200 max perhaps, but it wouldn't change the overall position or views significantly).

Having looked at the numbers number 2 seems to me financially the most practical way to achieve your overall objective of owning a house.  Can you get a house at max 400k and it meet your needs?


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## Sarenco (31 Mar 2016)

Excellent post Gerard - fully agree with your conclusion.


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## EmDilemma (31 Mar 2016)

Thanks for putting the time into that Gerard.

I'm going to go through what you said tonight and think.....

Hmmm......


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## Brendan Burgess (31 Mar 2016)

Gerard123 said:


> Is it practical/does it make sense to buy another intermediate house? I understand the logic, pros and cons. Reality is a lot of people did this, the so called 'starter home/apartment' and it didn't work out. I would advise against another intermediate house based on the facts here.



Gerard- we are in agreement that she should buy a house for no more than €400k.   
We are in agreement that this is a lot better than renting. 

I am describing this as an intermediate house and I think that she will consider it an intermediate house as well. It would be much better to wait until she has the savings and the salaries to afford a final house. But they don't. 

Yes, some people have got stuck in intermediate houses.  In fact, they are stuck on the first unsuitable rung of the ladder. Trading up to an intermediate house is risky, but I don't think she has a better alternative. 

Of course, I would always advise that they should stay in the current apartment for as long as possible to reduce their costs and to avoid any penalty for paying off a fixed rate mortgage early. 



> Much of your current funds will be depleted in 5-10 years, and it could well be near impossible to move again.



This is an interesting way of looking at it. She has savings of €45k and negative equity of €75k, so her current funds are -€30k. 

It's a peculiarity of the Negative Equity situation that this is a better position for buying a house, than having no savings and no negative equity. 

If she goes for a €400k house, her position will be  a house worth €400k with a mortgage of €430k or €30k negative equity.  It will be some years before they can trade up. They will have to pay down the NE and build up equity of at least €100k. 

So "intermediate" looks like at least 5 years, and probably, 10 years.


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## EmDilemma (31 Mar 2016)

Thanks for that Brendan.

We are thinking 5 to 10 years (hopefully longer) in any case for the final house.  The final house already exists in that it is my parents home and I don't want 
it to be vacated ANY TIME soon as I love its occupants, but I also am very attached to it and want to be able to move when the time comes (by move I mean buy my siblings out).

So that is what I mean by the final house- being able to purchase my family home when the horrible but inevitable time comes. A house I will have one third of - not sure what that means in terms of inheritance taxes as I haven't a clue about that. My siblings and parents are all on board with this plan but I would need to be able to  be in a position financially to do that.

So I am looking now for a good home for my husband, my child and myself (with hopefully another child at some stage). 

But when the time does come, I don't want to be unable to move on the family home.

Does that change anything? The fact the final home is a home I would have a share of?


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## Steven Barrett (31 Mar 2016)

Brendan Burgess said:


> Could you buy a house for €400k and trade up after a few years?



That approach probably has the OP in the situation where she is now. Sure buy an apartment, sell it at a profit and buy the house you really want to live in. 

If you are taking on 30 years worth of debt, you take a 30 year view on the property. 

Steven
www.bluewaterfp.ie


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## Gerard123 (31 Mar 2016)

Brendan, pretty much on the same page in terms of a house in the 400k price range, though differ on the 'intermediate' view.  Few edits, clarifications:



Brendan Burgess said:


> This is an interesting way of looking at it. She has savings of €45k and negative equity of €75k, so her current funds are -€30k.



Not literally deposit less NE, though understand my phrase led you there. I meant their then current or available funds/resources. They have an available deposit of 45k now and a current ability to save.  In 5-10 years if they rent I can't see how they will get near having a sufficient deposit.  Also run the significant risk that house prices could run ahead of their ability to save??



Brendan Burgess said:


> If she goes for a €400k house, her position will be  a house worth €400k with a mortgage of €430k or €30k negative equity.  It will be some years before they can trade up. They will have to pay down the NE and build up equity of at least €100k. So "intermediate" looks like at least 5 years, and probably, 10 years.



This is really critical, as given their likely ages, salary profile, living costs, children, etc, I can't see how they could pay off NE of 76 and save another 50.  That's over a thousand a month for 10 years (or 2,000 per month for 5).  Simply not do'able based on the facts here.



Brendan Burgess said:


> So "intermediate" looks like at least 5 years, and probably, 10 years.



It may simply be the term 'intermediate' house.  To me that suggests another interim and suboptimal solution, with the clear expectation that they move again.  My caution/concern is that if they go into the situation with this mindset, they could end up with a house they are not really happy with and always are looking towards the next move.  That next move could really be difficult.  My suggestion is to rethink the type of house that is acceptable to them longer term (20 year time frame) and seek that house now, though it needs to be in the region of 400k.

It may be that at a future date finances and circumstances allow a trading up.  However, I would not, if I was them, go buy a house and look at it as an intermediate solution.


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## Gerard123 (31 Mar 2016)

EmDilemma said:


> Does that change anything? The fact the final home is a home I would have a share of?



Not really in the short term, it may facilitate a trading up in the future, but it should not impact your decisions overly at this time.


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## Brendan Burgess (31 Mar 2016)

EmDilemma said:


> A house I will have one third of - not sure what that means in terms of inheritance taxes as I haven't a clue about that. My siblings and parents are all on board with this plan but I would need to be able to be in a position financially to do that.



Yes, that changes it quite a lot. 

Say it's a €600k house. As you will inherit 1/3rd of it, you will only have to pay €400k for it.  In effect, you will have a €200k deposit. 

So your priority now, is to clear your negative equity which will leave you in the most flexible position to buy that house when it comes up. 

The best way to clear your negative equity is to stay in your current apartment as long as possible.

As you have ruled that out, then you should buy a house for no more than €400k and work on clearing that negative equity. 

You _could _consider renting a €500k house and renting out your apartment.   If you knew that you were going to inherit your parents' house within 3 years, this would be clearly correct.  But as you expect it will be at least 5 and probably 10 years, then it would be a risky strategy.  You wouldn't have security of tenure. The cost of renting property is higher than the cost of renting money, and it's quite likely that the cost of renting will rise faster than interest rates. 

But if you absolutely can't find an acceptable property for €400k, then you could rent a €500k property.

Brendan


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## Gerard123 (31 Mar 2016)

I disagree with the renting option, Brendan.  Also I don't really see how the additional info changes current views that much.

IMO makes no sense for them to plan their housing needs simply on the basis that at some future date they will inherit a share of a house.  The date of such an event is unknown, and all indications are that it is not in the immediate future.  There are so many unknowns.  All very well to say everyone is on board, funny thing is money is one of the areas that siblings do disagree on.  Wills can be changed.  Parents get sick, who minds them, nursing home fair deal scheme??  Plenty of variables.  Perhaps there will be little to inherit??

They have a housing need now, one bedroom apt and one child.  Far better to sort themselves out based on the here and now, and known facts.  If/when they inherit that will allow them make another decision at that time, but it could be 10, 15, 20 years perhaps.  I would not confuse the decision that they have/want to make today by thinking about a potential future inheritance.

(If they rent for 5 years they will have paid rent of 114k (1,900 per month).  In 5 years if they go down option 2 that I set out earlier and borrow say 426k over 25 years their mortgage at the end of the 5th year would be 374k.  Better at that stage than having spent five years renting and then going through the whole process again of buy/rent, turmoil, etc.)


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## EmDilemma (1 Apr 2016)

Thanks Gerard and Brendan,

You've given lots of food for thought in terms of buying or renting..... so much to think about..

Forgetting about what we are going to buy or rent for the moment, and going back to the one bed apartment we have at the moment, I did read yesterday something about cash buyers hoovering up apartments in Dublin. Makes me wonder is NOW the best time to find a buyer. Given that it is a one bed apt I imagine we are unlikely to get a buyer from the mortgage world. More likely it woudl be purchased by a cash buyer. As it's a one bed, I hope it isn't hard to shift. But it is in Dublin 18 and a top floor apartment and so as one beds go it's lovely. But it seems that NOW could be a good time in terms of selling it.......


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## EmDilemma (29 Apr 2016)

Just to ask, we haven't paid our last water charge bill due to the uncertainty with Irish Water, can you sell a property do you know, with an outstanding water charge?


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