Negative equity - Can't switch from owner to buy-to-let mortgage

Very worried. I bought in 2007. House value was €225000, with €20,000 deposit + 205000 owner-occupier, first time buyer, mortgage. Have subsequently moved in with my partner to my partner's house and recently married.

As I no longer live in my home I wish to changethe mortgage to an investor, interest-only mortgage, otherwise I am defrauding the taxman?

However when I go online to see about switching, the most a bank will loan me is 85% of the present house value. The house has declined in value to an estimated €195,000 ( losing €30,000 ) and is now in negative equity. So I can't get a remortgage for more than €165,750 - a shortfall of almost €40,000. I am trapped - I want to change the type of mortgage I have in order to be tax-compliant, but it seems impossible.

What can I do?

I might be wrong on this, but I don't think you don't have to change the type of mortgage in order to be tax compliant. All you have to do is make sure you are not claiming owner-occupier interest relief on the house.

given that it's a pretty non standard situation you can't expect to solve this one online, call the bank and explain the situation. You may be switched to a higher interest rate but that will be about it (though there's probably fine print to say the bank can call in the full loan value as you've changed the orginal terms)

On the tax side you'll be liable for stamp duty now if you weren't before, unless you don't move out until the 2nd anniversary of the purchase.

Selling is an option, though you will be liable for any shortfall of proceeds versus the outstanding mortgage

You dont need an interest only mortgage to be tax compliant.

If you start renting the house out from say 1/2/2009, you can claim the interest element of the mortgage rept against the rental income for tax purposes.

Example

Rent in 2009 from 1/2/09 to 31/12/09 is say 11000

Total mortgage repayments from 1/2/09 to 31/12/09 = 15000
Interest element of this 15000 = 9000

Taxable rent = 2000

Stamp Duty
There might be an issue with stamp duty as you probably did not pay stamp duty on the purchase. You are no longer a first time buyer so check this out

I was talking with my tax consultant about this recently....the others are right. You are definitely not breaking any tax regulations by keeping your current mortgage (although you would need to read the T&Cs of your mortgage document to ensure that there are no problems with the bank on this). Insofar as stamp duty is concerned, as long as you lived in the place for 2 years, you are fine and there is no clawback. If you did not live in the place for 2 years after buying it (assuming you were a FTB and did not pay stamp duty when you bought), then you would be liable for a stamp duty clawback relative to the time period within the first 2 years that you have not lived in the property as your principle residence.

geld said:

I was talking with my tax consultant about this recently....the others are right. You are definitely not breaking any tax regulations by keeping your current mortgage (although you would need to read the T&Cs of your mortgage document to ensure that there are no problems with the bank on this). Insofar as stamp duty is concerned, as long as you lived in the place for 2 years, you are fine and there is no clawback. If you did not live in the place for 2 years after buying it (assuming you were a FTB and did not pay stamp duty when you bought), then you would be liable for a stamp duty clawback relative to the time period within the first 2 years that you have not lived in the property as your principle residence.

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I too am a FTB and owner occupier. So after two years I could begin renting my property and wouldnt be subject to any clawback of stamp duty??
Also I could continue with my existing mortgage eventhough I wasnt an owner occupier (as long as my terms and conditions didnt require me to change)???

So in terms of the taxman-
My mortgage is 1020 but my rent is only 650. There's no profit at all so I dont think I am liable for tax on the rental income but yes I will need to sort out any stamp duty owing. I am not claiming trs.

But in terms of the bank-
Selling isn't an option - why should I have to sell now at a loss of 20K deposit and owe the bank an additional 10K plus just because my marital circumstances have changed during the fixed term of the mortgage? I can't be the only person in the country that this has happened to. there must be provision for this? it is not in my interest to approach the bank until I know in advance that I am not going to be forced to sell. I don't have 30k tucked away somewhere and If I sell the house I dont; have collateral to offer a potential lender.

Where can I go for impartial confidential advice on how to correct my mortgage terms?

Youthesse said:

My mortgage is 1020 but my rent is only 650.

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It might be worth running the figures on your proposed investment. At first glance you seem to be putting 370 a month towards the mortgage, 4440 per year. This excludes the additional costs of renting out the property. With house prices heading only one way, south, for this year at the very least and the likelihood that rents will fall, it may make sense to cut your losses and have the extra cash in hand. I have heard one economist say that by 2016 houses will not have yet recovered to the price they were in 2006. And he was an optimist!

what a mess - all that effort and advice to "get on the property ladder" and 2 years later I'm being advised to fall off it again 30k+ poorer including a minimum of 10k+ I have to find to give the bank for the mortgage shortfall.

This is on top of our first pregnancy which because there are complications involves fertility treatment costs and private consultancy fees. This generation of 30 somethings are being totally squashed from every angle. This isn't about getting rich quick or investing wisely its about struggling to cover the cost of living in Ireland today.

you're right, for anyone who bought a house in the last 5 years moving out is not a great option. Hats off to the minority who said the situation was ridiculous at the time but the majority carried on oblivious and the likes of yourself are now left holding the baby (if you pardon the pun...)

The options over the last few years for the likes of yourself have not been great. There's no security in renting and no culture of long term leases in this country.

Where to go from here though? you have two options
1. Continue to rent your first place, subsidising the difference between rent and mortgage out of your own pocket in the hope all will come good. You'll need to make sure you are compliant with any stamp duty rules, however, and there's always the possibility the bank could change the terms of your mortgage.
2. Sell and realise your loss. No one knows for sure if things will get better or worse. If you hold on and things get better, great. The alternative could see you not even being able to rent the property and having to cover the entire mortgage yourself. Taking a set loss now could save you from ultimate ruin.

I would advise stay in your own home until the two year anniversary is up to avoid any stamp duty implications. Can you and your husband live there for a few months?

Check the T&C's of the mortgage to see the implication of switching to an investor type mortgage. You mentioned being afraid the bank would force you to sell. As long as you are paying your mortgage they aren't going to force a sale at a possible loss. I'm not sure why you think they would? The bank is the only one who can tell you the implications on YOUR mortgage for switching.

Nobody is telling you to get off the property ladder, but your circumstances are different now that you are married. You are now a two property family and even if you sell at a loss you will still be on the property ladder.

Investments can rise as well as fall. If you have made a bad investment you have to take the hit. That might be subsidising the rent until the market picks up, or selling at a loss, or both.

Good luck with the baby making though!

My advise is to sell and take the hit of 10K. If that's all it will cost you - it's cheap. This advise is based on the figures you have posted and your lack of knowledge in relation to renting or mortgages. There is no way rent of 650 is going to make sense on this.