Negative Equity Mortgage - pay off or save??

[Steven Barrett]

Could you buy a house for €400k and trade up after a few years?

That approach probably has the OP in the situation where she is now. Sure buy an apartment, sell it at a profit and buy the house you really want to live in.

If you are taking on 30 years worth of debt, you take a 30 year view on the property.

Steven
http://www.bluewaterfp.ie (www.bluewaterfp.ie)

 

[Gerard123]

Brendan, pretty much on the same page in terms of a house in the 400k price range, though differ on the 'intermediate' view. Few edits, clarifications:

This is an interesting way of looking at it. She has savings of €45k and negative equity of €75k, so her current funds are -€30k.

Not literally deposit less NE, though understand my phrase led you there. I meant their then current or available funds/resources. They have an available deposit of 45k now and a current ability to save. In 5-10 years if they rent I can't see how they will get near having a sufficient deposit. Also run the significant risk that house prices could run ahead of their ability to save??

If she goes for a €400k house, her position will be a house worth €400k with a mortgage of €430k or €30k negative equity. It will be some years before they can trade up. They will have to pay down the NE and build up equity of at least €100k. So "intermediate" looks like at least 5 years, and probably, 10 years.

This is really critical, as given their likely ages, salary profile, living costs, children, etc, I can't see how they could pay off NE of 76 and save another 50. That's over a thousand a month for 10 years (or 2,000 per month for 5). Simply not do'able based on the facts here.

So "intermediate" looks like at least 5 years, and probably, 10 years.

It may simply be the term 'intermediate' house. To me that suggests another interim and suboptimal solution, with the clear expectation that they move again. My caution/concern is that if they go into the situation with this mindset, they could end up with a house they are not really happy with and always are looking towards the next move. That next move could really be difficult. My suggestion is to rethink the type of house that is acceptable to them longer term (20 year time frame) and seek that house now, though it needs to be in the region of 400k.

It may be that at a future date finances and circumstances allow a trading up. However, I would not, if I was them, go buy a house and look at it as an intermediate solution.

 

[Gerard123]

Does that change anything? The fact the final home is a home I would have a share of?

Not really in the short term, it may facilitate a trading up in the future, but it should not impact your decisions overly at this time.

 

[Brendan Burgess]

A house I will have one third of - not sure what that means in terms of inheritance taxes as I haven't a clue about that. My siblings and parents are all on board with this plan but I would need to be able to be in a position financially to do that.

Yes, that changes it quite a lot.

Say it's a €600k house. As you will inherit 1/3rd of it, you will only have to pay €400k for it. In effect, you will have a €200k deposit.

So your priority now, is to clear your negative equity which will leave you in the most flexible position to buy that house when it comes up.

The best way to clear your negative equity is to stay in your current apartment as long as possible.

As you have ruled that out, then you should buy a house for no more than €400k and work on clearing that negative equity.

You could consider renting a €500k house and renting out your apartment. If you knew that you were going to inherit your parents' house within 3 years, this would be clearly correct. But as you expect it will be at least 5 and probably 10 years, then it would be a risky strategy. You wouldn't have security of tenure. The cost of renting property is higher than the cost of renting money, and it's quite likely that the cost of renting will rise faster than interest rates.

But if you absolutely can't find an acceptable property for €400k, then you could rent a €500k property.

Brendan

 

[Gerard123]

I disagree with the renting option, Brendan. Also I don't really see how the additional info changes current views that much.

IMO makes no sense for them to plan their housing needs simply on the basis that at some future date they will inherit a share of a house. The date of such an event is unknown, and all indications are that it is not in the immediate future. There are so many unknowns. All very well to say everyone is on board, funny thing is money is one of the areas that siblings do disagree on. Wills can be changed. Parents get sick, who minds them, nursing home fair deal scheme?? Plenty of variables. Perhaps there will be little to inherit??

They have a housing need now, one bedroom apt and one child. Far better to sort themselves out based on the here and now, and known facts. If/when they inherit that will allow them make another decision at that time, but it could be 10, 15, 20 years perhaps. I would not confuse the decision that they have/want to make today by thinking about a potential future inheritance.

(If they rent for 5 years they will have paid rent of 114k (1,900 per month). In 5 years if they go down option 2 that I set out earlier and borrow say 426k over 25 years their mortgage at the end of the 5th year would be 374k. Better at that stage than having spent five years renting and then going through the whole process again of buy/rent, turmoil, etc.)

 

[EmDilemma]

Thanks Gerard and Brendan,

You've given lots of food for thought in terms of buying or renting..... so much to think about..

Forgetting about what we are going to buy or rent for the moment, and going back to the one bed apartment we have at the moment, I did read yesterday something about cash buyers hoovering up apartments in Dublin. Makes me wonder is NOW the best time to find a buyer. Given that it is a one bed apt I imagine we are unlikely to get a buyer from the mortgage world. More likely it woudl be purchased by a cash buyer. As it's a one bed, I hope it isn't hard to shift. But it is in Dublin 18 and a top floor apartment and so as one beds go it's lovely. But it seems that NOW could be a good time in terms of selling it.......

 

[EmDilemma]

Just to ask, we haven't paid our last water charge bill due to the uncertainty with Irish Water, can you sell a property do you know, with an outstanding water charge?