Key Post House too small for my family - what are our options?

Brendan Burgess

Brendan Burgess

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This issue comes up a lot, so here is a Key Post in an attempt to provide a systematic answer to the question

Options
1) Stay in your apartment as long as possible
2) Rent out the apartment and rent a house
3) Sell the apartment and rent a house
4) Get a negative equity mortgage which allows you sell the apartment and buy a house with a bigger mortgage
5) Buy a new home and keep the apartment as an investment
6) If you are insolvent, appply for one of the insolvency solutions, and rent a new house or rely on social housing.
7) If you have a small house instead of an apartment, consider an extension, but bear in mind that you will not recover the money spent on extending your house when you go to sell it

Be realistic - you may not be able to move for some time
If you are already struggling with the repayments on your mortgage for the apartment, then you will not be able to afford the much higher repayments from one of the other solutions.

Even if you are not struggling with your repayments now, you may find yourself struggling with the new repayments or rent. You are probably better off being financially secure in a cramped apartment than financiall struggling in a house.


Factors to consider
1) Do you have a cheap tracker mortgage?
2) How urgent the move is?
3) The extent of negative equity
4) Whether or not you have a clean ICB record (Irish Credit Bureau)
5) Your income and the outlook for your income
 
Option 1 - Stay in your apartment as long as possible

This is certainly going to be the most financially viable option and it's the first option that you must consider.

All the other options will be much more expensive. You should use the money saved through this cheaper option to pay down the mortgage as quickly as possible

You are probably better off living in a cramped apartment which you can afford than to be in constant risk of losing your home because you traded up when you couldn't afford it

Bringing up children in apartments is commonplace in other European countries. It's becoming much more common in Ireland as well.

Some posters insist that they must move as soon as the woman becomes pregnant, or as soon as they have a second child. If you have a two bedroom apartment, there is no reason why you can't bring up two children for some years. It may not be ideal, but it's the best financial option and allows you to secure your financial future.

Bear in mind that if you have two children, you will have high child care costs.

Factors arguing for a stay in your apartment

  • You have a cheap tracker mortgage - Not only are the total repayments cheaper, but you are paying down the capital and negative equity very quickly. Your bank may allow you to retain the cheap tracker if you trade up
  • You have a fixed rate mortgage - you will have to pay a penalty for an early repayment of this, although you may keep it with a negative equity mortgage.
  • Low income - you may not be able to afford a higher mortgage
  • Job instability - you may not be able to afford higher rent or a higher mortgage
  • High negative equity - Your first priority should be to reduce this as much as possible
  • You are living close to work - You don't want extra commuting costs on top of extra mortgage or rental costs
Factors in favour of moving


  • High incomes - you can comfortably afford a higher mortgage
  • Low negative equity
  • SVR mortgage
  • Apartment easy to sell or easy to let
If you choose to stay a bit longer, plan ahead for the move


  • Use the money saved by paying down the mortgage as much as possible
  • Don't fix your mortgage rate, so you can have as much flexibility as possible
  • Defer having a child or a second child for as long as possible
  • Don't spend huge money on furniture and decoration which may need to be redone for letting it out
 

For those with cheap trackers

Update 22 June 2014

The following lenders now allow borrowers to move their trackers to a new property:

  • AIB - increased margin of 1% for full duration of the loan
  • ptsb - increased margin of 1% for full duration of the loan
  • Bank of Ireland - increased margin of 1% for 5 years, followed by SVR for remaining term
  • Ulster Bank - increased margin of c.1% for 5 years, followed by SVR for remaining term
  • KBC - not sure
Check out: Your guide to trading up with a tracker mortgage


If you have a tracker mortgage with Danske Bank or Bank of Scotland, you will not be allowed to to transfer it to a new property.

But, it's possible that, at some stage in the future, they might offer an incentive for people to pay off their cheap trackers early. You can't expect this, but it's another reason for delaying the move as long as possible.


Losing a cheap tracker would be very expensive

Let's say you have a €300k mortgage over 25 years.
The lender allows you to borrow an additional €100,000 but charges you the Standard Variable Rate of 4.5% on the entire mortgage
House value| €200k| €300k
Mortgage amount|€300k |€400k
Interest rate | 1.5% |4.5%
Yearly interest cost| €4,500 |€18,000
Monthly repayment| €1,200|€2,200
The additional interest is €14,000 a year for borrowing an extra €100,000.



Keeping the tracker for 5 years will really eat into the negative equity

monthly repayments | €1,200
Interest element| €375
Capital element|€825

You are reducing the mortgage balance by €10,000 a year, because the interest rate is so low.
If you can afford the €2,200 repayments on the more expensive mortgage, why not make them on the cheap tracker?

Total capital repaid :€2,025 per month ( €825 + €1,000)
Time taken to pay off €100,000 negative equity: 50 months or just over 4 years. (It's actually a bit less because of compound interest)

If house prices increase, you could be out of negative equity sooner.
 
The tax and financial implications of renting your apartment


Taxation



You will lose TRS on your interest payments as it's no longer your home.

However, you can set 75% of the interest payments against the rent received when calculating the taxable income

You can set other costs - such as management fees against the rent



Rental income| €12,000 |

75% of interest paid| €3,940|75% of €5,250 (€350k @1.5%)

Management fees| €1,500
Insurance;etc| €1,000

Taxable income| €5,560


Note that you can claim tax relief only on the interest element of the repayments and not the capital element.



You don't get any tax relief on the rent which you pay on the new house



Mortgage rate
In general you won't pay a higher mortgage rate for renting out your apartment but check it out first

Insurance
You must notify your insurance company that you are now renting out the property
 
How to financially evaluate renting out your apartment

It's best to illustrate this by way of a simplified case study

Loan outstanding|€350k |
Interest rate|1.5%|ecb + 1%
Term remaining |20 years
Monthly repayment|€1,700
Monthly rent | €1,000
Cash-flow shortfall|€700k

Most people in this position would say something like "Keeping the apartment will cost me €700 per month".

But the repayment includes a capital element

The correct way of looking at this is

Monthly rent | €1,000|
Monthly interest| €440|€350k@1.5%/12
Profit before tax |€560
Tax|€340
Profit after tax|€220

This is a profitable investment and probably worth keeping.

While there is a monthly cash-flow cost, this borrower is actually repaying €1,260 per month in capital. In other words, they are reducing their mortgage and negative equity by €15,000 each year.
 
Option 2 - Rent out the apartment and rent a house

Factors in favour of this

  • If you have a cheap tracker, it is usually worth keeping
  • If you have an interest only mortgage, the repayments may be quite low
  • You can get to try out an area before you decide to buy there
  • Your apartment may not be easy to sell, but may be easy to rent
  • You keep a stake in the property market - for better or worse.
  • You have high negative equity which you can't pay off through savings - your only hope is that prices may eventually increase and reduce your negative equity
Factors against


  • You may lose your tracker if you rent out your apartment
  • The hassles of being a landlord
  • The hassles of being a tenant
 
Option 3 - Sell the apartment and rent a house

Factors in favour


  • The negative equity is small and you will be able to repay it from your income in a short period
  • You have a SVR mortgage
  • You don't want the hassle of being a landlord
  • The rental income would not cover the interest paid on the mortgage
  • You believe that house prices may decline
  • You are unsure where you want to live
  • At present, you can't afford to buy where you want to live, but may be able to in the near future
 
Option 4 - Get a negative equity mortgage

ajk24 has documented his successful use of this here:
How we got a negative equity trade up from EBS

Factors in favour

  • You have a high income
  • You have a Standard Variable Rate mortgage
  • You have a cheap tracker which the lender allows you to transfer
  • You can afford the house you want to buy
Factors against


  • You will lose your cheap tracker
  • You will be struggling with the higher repayments
  • Your employment is not secure
  • One of you wishes to give up work to mind the children


Which banks allow negative equity mortgages and retention of trackers?

Most banks will allow negative equity mortgages to people who can afford the higher repayments, but they will insist on you losing your tracker.



Bank of Ireland allow you to keep your tracker for 5 years, but on a slightly higher rate.


Ulster Bank allow people to port their trackers, but I don't know if they allow people in negative equity to do this.



A simplified example -



|Existing |after trade-up
Value|€200|€300
Mortgage|€400k|€500k
Repayments| €x |€x + 20%

Negative equity|€200k|€200k
Loan to value|200%|166%


You are getting 50% more house, but your repayments are rising by only 20%.



Because you have a more valuable house, it does not have to rise as far to eliminate negative equity


On the other hand, if house prices fall, your absolute negative equity will be higher



You should only consider a negative equity mortgage


  • If you can comfortably afford the new repayments
  • If your job and income is very secure
  • If you both can continue to work
It is hard to put a price on financial security. Even if you can afford a negative equity mortgage now, you should really defer the decision to move as long as possible and reduce the negative equity
 
Option 5 - Buy a new home and keep the apartment as an investment

This will only be possible if

  • You have a good deposit for the new home
  • You have low negative equity or positive equity
  • You have the income to get a new mortgage
This will only be advisable if


  • You have a cheap tracker mortgage
While this option may not be available to you now, it's still worth bearing in mind. Maybe you should stay longer in your apartment so that you can avail of this option in a few years.
 
Option 6 - Insolvency

To avail of one of the insolvency schemes, you have to actually be insolvent. The test of insolvency is being unable to meet your repayments as they become due. If your apartment is too small for you but you can meet the repayments, then you are not insolvent.

If your apartment is too small, and you are in deep negative equity and you cannot meet your repayments you could try one of the following:

All of them involve losing your apartment. You will then need to rent a house or rely on social housing.

Sell your apartment and then apply for a Debt Settlement Arrangement to settle your unsecured debtors
This would be the cleanest arrangement. By selling your apartment first, you will get more for it than you would get through a Personal Insolvency Arrangement or bankruptcy.

It's also likely that unsecured creditors will take less interest in a DSA than secured creditors would take in a PIA.

You will need your lender's approval to sell your property at a loss.

Apply for a Personal Insolvency Arrangement
If you have been unable to sell your apartment, you could apply for a PIA. The Personal Insolvency Practitioner would hand the apartment back to the lender and seek to settle the shortfall and other unsecured creditors.

Under a PIA, the PIP is obliged to try to keep the family home for you if it's suitable for your needs. The PIP might not accept that the apartment is not suited to your needs.

Bankruptcy
If you are bankrupt, the apartment will be sold or handed back to the lender.
 
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