How to handle serious negative equity?

Negative equity means that the outstanding mortgage is greater than the value of the house. It has absolutely nothing to do with the affordability of the mortgage or disposable income.
 
I know what negative equity is thanks very much.

Since someone in negative equity has invariably overpaid for a property, this has ongoing repercussions to them. If it is funded by long term debt, such as a mortgage, it will be a drain on their cash flow into the future.
 
How can you say they have "overpaid" for the property, just because it is in negative equity.

Does that mean that everyone that buys a car overpays for it?
 
Afuera said:
I know what negative equity is thanks very much.

Since someone in negative equity has invariably overpaid for a property, this has ongoing repercussions to them. If it is funded by long term debt, such as a mortgage, it will be a drain on their cash flow into the future.
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Everyone who takes out a long term mortgage will have a drain on their cash flow. What has that got to do with negative equity?

You are talking about people with different size mortgages. That is a different argument to the effects of negative equity.
 
Afuera said:
The worst thing, is that this will continue for the life of the mortgage. The person who bought in 2007 will be paying more of their life's earnings for a roof over their head than the person who bought in 2010.

I'm sorry, it may be unpopular to say it, but it is too blinkered a view to only focus on how negative equity affects a person when they have to sell.
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That's not negative equity you're talking about, that's just the fact that one person has a higher mortgage than their neighbour because the house cost more when they bought it. It's tough but nobody is going to help them with that - after all nobody guaranteed them prices wouldn't fall - that was a risk they took on themselves.
 
Sunny said:
You are talking about people with different size mortgages. That is a different argument to the effects of negative equity.
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They are two sides of the same coin though.

As an illustration, take for example a recently built estate somewhere in Ireland. Those in negative equity will have to have larger mortgages than their neighbors.
 
Some people are in negative equity, but because interest rates have been slashed are actually better off financially in regards disposable income.
The big problem is whether people will be able to move or not in the coming years. This will mean a reduction in stamp duty but the government may move to an annual property tax soon anyway.

I have friends that bought 1-bed apartments at the height of the boom as starter homes. Now they are in a position where they might want to start a family but cannot move and may not want to raise a family in a small apartment. So the long term consequences may be more social than financial for some people.
 
Afuera said:
It is too blinkered a view, to only focus on how negative equity affects a person when they have to sell.
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I wasn’t actually focusing on how negative equity affects a person when they have to sell. You clipped off the bit where I mentioned context & you are focusing on a person's neighbours rather than the person themselves – which is twice as blinkered IMO. You can't expect to be approved for a mortgage merely because your neighbour has been, you can't expect to fit into a size ten purely because your neighbour has either. That's just the way life is I'm afraid.
Afuera said:
I disagree. In all instances, negative equity affects the quality of life you can afford compared to your neighbors.
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You use an extreme example. The exact same example could be used to demonstrate the affects on quality of life for those in positive equity. Time has never stood still. Neither have house prices. The purchase example could also be used in relation to a tee-shirt, a dvd player or a package holiday (at the exact same time). Getting hung up on how much someone else paid for an item is fruitless as you are not walking in their shoes. It’s better to live your own life according to your own means & accept the choices you have made.

The fact is that the majority of home owners are unaffected by negative equity. You may choose to believe otherwise, which is your right.
 
Conversely 2 people may have paid the same price for 2 houses beside each other. They may both have paid over the odds, but only 1 one is in negative equity. Riddle me that.

100% mortgages. Interest Only mortgages. Payment holidays. Mortage top-ups.

All of these were lifestyle choices. There are consequences to lifestyle choices. As it turns out Negative Equity can be one.

People may have been encouraged to make these choices, but they were their choices nonetheless.

Brendan said:
People buying their first home have very big expenses in the first few years. I recommend that they start with an interest-only mortgage.
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Howitzer said:
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100% mortgages. Interest Only mortgages. Payment holidays. Mortage top-ups.
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Whatever about the others being lifestyle choices, I do actually have a problem with 100% mortgages. It was the most blatant mis-selling of a financial product I have ever seen in retail banking. What's worse is that is was openly done with the Financial Regulators approval.

I do agree about personal repsonsibility though.
 
Sunny said:
Whatever about the others being lifestyle choices, I do actually have a problem with 100% mortgages. It was the most blatant mis-selling of a financial product I have ever seen in retail banking. What's worse is that is was openly done with the Financial Regulators approval.

I do agree about personal repsonsibility though.
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I don't understand how it's mis-selling. They applied for a 100% loan and that's what they got. In reality all it did was normalise the situation where people previously got their deposits from the credit union.

I don't really see it as being much different from the others as a lifestyle choice.

"I want a house today. Why save? Get a 100% mortgage - it's your life, live it your way."

Or some such nonsense. I'm sure there were a couple of adds along those lines. The "Your place or mine" ones spring to mind. They were all nonsense. But so is most marketing. Where was the mis-selling? If ugly Irishmen could sue a bank because getting an apt didn't turn them into Casanova I think we're really in trouble.
 
It was mis-selling because that product was designed for certain people. It was never meant to be widely available. When First Active introduced the product, many commentators raised objections. First Active's and the regulators response was that it would not be widely available and would only be suitable for people in certain professions. Within days, First Active were handing out flyers on O'Connell St and advertising on the back of buses. All the other banks jumped on the bandwagon and the Financial Regulator kept their mouth shut. Eventually they realised the danger and attempted to make the banks hold more capital against the mortgages. So if takes our Financial Regulator so long to see the dangers in the product, what chance does some 24 year old bricklayer have?

It is no different to selling investment products to people. Sometimes people need to be protected from their own ignorance when it comes to finance. Thats why we have consumer law and regulators.
 
I would say it's poor regulation rather than mis-selling. If it wasn't within the confines of the regulations it would be mis-selling - the issue is that is was, and was widely available.
 
Sunny said:
Sometimes people need to be protected from their own ignorance when it comes to finance. Thats why we have consumer law and regulators.
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That's the problem with mortgages; it involves people who are for the most part, financially illiterate, and in some case, intellectually deficient, making a decision to spend 10 times or more their annual salary on a single item. Some people need to be protected from themselves, since society ends up paying for their mistakes.
 
Afuera said:
While this may make a nice soundbite in the press, it is not backed up by fact. In all instances, negative equity affects the quality of life you can afford compared to your neighbors.

Take an example of two people with the same job and wages, living in the same type of house in the same area, but where one bought in 2007 and the other in 2010. The person who bought in 2010 will be wealthier and able to pay for a better quality of life than the person who bought in 2007. Moreover, they will have excess disposable income that could be invested in a productive part of the economy.

The worst thing, is that this will continue for the life of the mortgage. The person who bought in 2007 will be paying more of their life's earnings for a roof over their head than the person who bought in 2010.

I'm sorry, it may be unpopular to say it, but it is too blinkered a view to only focus on how negative equity affects a person when they have to sell.
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You seem to be confusing a difference in the price paid with negative equity.

The price you paid for the house affects what else you can afford to buy - kids learn this playing Monopoly.

Even in the example you cite, prices actually rose from 2007 to 2008.

If your income falls for whatever reason, difficulties in paying a large mortgage arise whether the house is in positive equity or not.

Negative equity means your house is worth less than the outstanding mortgage amount.

The definition of Negative equity is the same whether you're a millionaire or on the dole, whether you've played the markets of been played by them.

ONQ.
 
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