Could lenders facilitate trading up or trading down?

Brendan Burgess

Founder
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The discussion of bridging in another thread made me think of this.

Let's say I have a house worth €300k with a €100k mortgage.
I sell it and have €200k cash.
I am approved for a loan of €300k so I buy a house for €500k.

Why does the lender not lend me the €500k on an ordinary mortgage on condition that I sell my own house?

They would have €600k of mortgages on properties worth €800k - so 75% Loan to Value.

The Central Bank rules would not allow it, but park them for the moment, as they could be adjusted to cater for it.

Of course, people would exploit such loans by saying that they plan to sell their own home, and then they just keep it as an investment and so the bank faces a longer term risk.
And there is a risk of house prices falling and the client is unable to sell the original house and ends up with a bigger mortgage.

Are there any ways for the bank to mitigate the risk involved?
The house would have to be actively on the market.
Maybe the maximum Loan to Value would be 50% - or 75% if contracts have been exchanged.
Could some sort of higher interest rate be charged during the "bridging" period? So if the rate on the new mortgage was 1% per month, it would be a huge incentive for the client to sell the initial property as quickly as possible.
 
There would be many benefits to such a product

A lot of the chains which break down now, would not break down.
Someone could buy a house and do it up while continuing to live in their own house.
It would make trading down much easier.
 
Brendan Burgess said:
There would be many benefits to such a product

A lot of the chains which break down now, would not break down.
Someone could buy a house and do it up while continuing to live in their own house.
It would make trading down much easier.
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Brendan, the position until the launch of the ICS product has been ridiculous. People with no existing mortgage were denied bridging when trading down. People with €2m properties looking to buy a €500k apartment were being told to sell, then rent, then buy, so they’d end up doing nothing because who wants to rent when it’s not their thing?

Lending someone €500k against €2.5m of property for a few months is about as low risk property lending as one can find. It’s idiotic that the banks weren’t doing it. Do it, and charge a premium for it!
 
Gordon Gekko said:
People with €2m properties looking to buy a €500k apartment were being told to sell, then rent, then buy, so they’d end up doing nothing because who wants to rent when it’s not their thing?
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I suspect that part of the reason for it is that they would get slated on Joe Duffy for daring to charge a proper rate for it. "Wha...? They lent you €500k for three months and charged €20k compound interest? " And then the Oireachtas Finance Committee would want them in and ask how they could justify these moneylender rates.

So, there is very little profit and potential reputational damage.
 
Back in the 1970's and 1980's it was the norm to offer bridging finance. Higher interest was charged on the loan. It worked.
 
From an accounting perspective, the €200k (€500k-€300k value in the house) is an unsecured loan as there is no asset backing it. So it is quite possible that ECB, CBI and accounting rules would need to be changed to facilitate this, in particular to the banks having an increased amount of unsecured debt on their balance sheet.

Could that be done, yes, could it be done quickly, unlikely
 

thedaddyman said:
From an accounting perspective, the €200k (€500k-€300k value in the house) is an unsecured loan
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The lender has a loan of €100k on a €300k house.
They have a loan of €500k on a €500k house.
They cross charge them as well.

What bit is unsecured?
 
It's a lot more than just the Joe Duffy reputational damage. There is very little upside to facilitating this commercially and a whole lot of bad publicity when it goes wrong.

The €2m to €500k downsizing is not realistic. I would highly doubt anyone has ever traded down to 25% of their PPR.

If you take a more typical view of retired couple (Dublin) living in an 800k property who want to trade down to a €500-600k property

It's fairly reasonable to think they may not have a lot of income, all of their wealth comes from buying a house at the right time in the right area 30-40 years ago

If they used ICS for €500k, any hiccup, delay or downturn would be disastrous for everyone involved.

They can't afford 1% interest only per month €5k. A sale falls through, property prices dip and 10-20% gets wiped off the €800k property.

Any equity they thought would be released has been wiped out. So what happens in this situation??

The lender can't repossess, takes too long and doesn't look good

The interest rate is crippling to the buyer at 12% per annum, they can't even rent it temporarily to offset the costs with the risk of tenants gaining additional protection after 6 months.

In saying all of that, I think it is something that is needed but should be supported by the state. Getting the right people into the right sized houses is good for the market overall. A lender charging 12% does not do that
 
_OkGo_ said:
If you take a more typical view of retired couple (Dublin) living in an 800k property who want to trade down to a €500-600k property
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I have very little direct experience, but if someone with a house worth €800k told me that they were planning to trade down to a €600k house, I would tell them not to bother. The costs, hassles and risks would just not be worth it.

Of course, someone might want to move from an €800k house to a €600k house in a different location or a bungalow or a warmer home. But it would be crazy to do it for financial reasons.
 
Brendan Burgess said:
Of course, someone might want to move from an €800k house to a €600k house in a different location or a bungalow or a warmer home. But it would be crazy to do it for financial reasons.
Click to expand...

I think people looking to move down typically have a combination of reasons like this for doing so.
A smaller property and more compact site that is easier to maintain.
Maybe closer to family and/or amenities.
Existing house needing significant work.
If they can move and free up maybe €100,000 or so to adapt and fit out the new property to their needs (and maybe some left over) it is an attractive proposition.
But not if they are looking at the prospect of selling first and getting a rental while searching for a new home.
 
Brendan Burgess said:
So that is the problem. You are saying that it's not worth it for the lender or the borrower at 12%!
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In a nutshell, yes. ICS have already determined that the product is profitable for 1 month with the entry/exit fees otherwise they wouldn't offer it. If they have covered their costs then why continue charging 1%, beyond 3-6 months?

If the property market is stable, it all looks good on paper and sales go through in 3-6 months. Everyone is happy.

If anything happens to that sequence, e.g. a significant drop in prices, the lender is now charging rates far higher than what 'vulture' funds are charging. You have two pensioners with modest income with a huge debt at 12% interest. It's a mess for all parties involved.

Brendan Burgess said:
I have very little direct experience, but if someone with a house worth €800k told me that they were planning to trade down to a €600k house, I would tell them not to bother. The costs, hassles and risks would just not be worth it
Click to expand...
I'd agree that currently it's not worth the risk but it should be. That is exactly the churn that the property market needs. Older couple wants to move to a smaller, warmer more convenient location in the same general area they have always lived in while freeing up a house that could be bought by a growing family.

I know I'm derailing now so I'll stop after this but the whole conveyancing and property sale sequence in Ireland is incredibly archaic. The buyer beware nonsense is most of the problem with this causing delays and stalling in chains.

The seller should meet a certain legal standard before being allowed to advertise including all title, land registry, engineers reports etc. If everyone had this, sales would be quicker and chains would not be a problem. It would also derisk the product that IFC are offering
 
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