Is trading up a good idea in a rising or falling market, although in negative equity?

[Pinkpanter]

Hypothetically are negative equity mortgages
more risky in a falling or rising property market.
We are thinking of moving ie selling apartment and moving to
a house but I'm not sure it's a good idea. Not an urgent
move but is it better to move now.
We had planned to revisit the idea in 5 years time but are we better to take on more debt now rather than 5 years down the road (older).

 

[Brendan Burgess]

Assuming constant house prices, you are financially better off staying where you are and paying down as much of the loan an negative equity as possible.

Assuming falling house prices, again, you are better off financially staying where you are.

Rising house prices is a bit trickier. Generally speaking you are better off having more of an asset which is rising in value.

Let's look at an example with house prices rising by 3% and mortgage interest at 5%

| before trade-up| after trade-up
House value| €100k|€200k
Mortgage|€200k| €300k
Additional interest||€5,000
Less increased value||€3,000
Additional cost||€2,000

If house prices rise at a rate higher than the interest rate, then you will be better off.

If house prices rise at a rate lower than the interest rate, then you will be worse off.

Brendan

 

[Brendan Burgess]

It's impossible to predict house prices with any confidence.

If you have a cheap tracker which you might lose by trading up, then you are better off staying where you are and paying down the negative equity as quickly as possible.

 

[ronaldo]

I'm looking at trading up over the next 12-18 months myself but am not in negative equity. I want a 20% deposit to secure a good rate so, price reductions, whilst leaving me better off on the long run, will require more money to fund the move.

I have €60,000 equity in my current €200,000 house and moving to a €300,000 house will result in this decreasing to 20% equity. Therefore, the move could now be made without requiring any additional funds for the deposit.

If prices across the board reduce 10% before my move, I'll have €40,000 equity remaining and would need €14,000 more to achieve a 20% deposit on my new home, now valued at €270,000. However, my required mortgage would decrease by €24,000 to €216,000.

If prices rise by 10% across the board, I'll have €80,000 equity in my current home and would only need €66,000 to fund a 20% deposit on the new home. However, assuming I use the entire €80,000 as a deposit, my mortgage would need to be €250,000 on the new house, now valued at €330,000.

Therefore, falling prices results in the upsize costing you less in the long run but requires more savings to fund the deposit when trading up.