Negative Equity - Need to Move House

N

NegEquity

Guest
Hi,

Myself and my wife (one of us a few years either side of 30) are in the following financial situation:

Wages: Both ~ €60k per annum in absolutely secure jobs
Overtime: Approx €20 k per annum for me (In fact could be more - due to nature of job and skills I have this is guaranteed as long as I am willing to do the work. At the moment I am very willing!)
Bonus: Probably €10k per annum each

Both our careers are going well and we hope to increase our wages and decrease the reliance on overtime over the next few years. Promotions are likely in the next 6 months.

Therefore we end up with around €150k in total income each year. We have savings of €85k at the moment and each month we save €3k between us. We have no personal debts.

The situation described above is quite healthy but here is where it gets tricky!

Unfortunately we bought a house in Aug 2006 for €380k. We got 100% mortgage due to nature of our jobs and I reckon that is now worth somewhere between 230 and 250 (assuming a 40% drop from the peak which occured not long after we bought). We owe 360k at the moment. The house is in good condition and in a desirable area. We have thought about overpaying on the mortgage but feel we are as well off to get to €100 k in savings since we have a very competitive tracker at the moment. We will reassess what we do in the next few months when we hit the 100 k mark. (We are determined to hit the €100 k mark as we want to have some kind of a financial blanket in these crazy times).

The house we have is in the wrong part of the country for our needs. Ideally we would like to buy a house closer to where we now work.....a lot closer. Additionally we would like to think about starting a family within the next 3/4 years and our current house isnt suitable. Our wages have increased significantly since we first bought the house and they are likely to increase as described above. We are in no mad rush but want to get a feel of where we stand. Slightly long winded and hope i havent lost you!

My questions:

  • If we were to try and get a mortgage how much would we get based on our above financial position? Could we hold on to the existing house and rent it out and buy a new one? (Or is this just a crazy idea!).
  • Also have you any general advice for us once we hit the €100k mark in savings? We were thinking of continuing to save €1000 per month, invest €1000 per month in shares and overpay on our mortgage by €1000 per month.
  • Any other comments would be be welcome!
Thanks
 
NegEquity said:
We were thinking of continuing to save €1000 per month, invest €1000 per month in shares and overpay on our mortgage by €1000 per month.
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Investing in individual shares is akin to gambling. You would get a more certain return by either saving in cash or paying off the mortgage.
 
You should not be overpaying the mortgage if it's a good rate and you can get a higher rate on deposit.

You have an exposure of €230k to the property market at the moment. This is not high based on the salaries you are on. However, if you buy another house for, say €300k, you will be overexposed to the property market.

You are well off, in fact, you are very well off. You can afford to live in a more convenient home. This is probably more important than the financial considerations. You should put your home on the market now as it will take a long time to sell. When you eventually sell it, you will be able to take out a personal loan for any deficit. You can then rent a home in the place where you want to live. Or if the deficit is small, you may be able to get another mortgage at that stage.

But your plan could take at least 12 months to implement. Start by putting the house on the market now. You are in no rush to sell though.

Brendan
 
Thanks for the replies. I am very interested to hear what other people think - perhaps this thread might be moved to the Money Makeover forum to get a few more opinions????

Bob_tg: not sure if i would agree with you that buying individual shares is akin to gambling - my plan was to invest a set amount each month and try and build up a porfolio of well diversified shares......am i missing something?

Brendan: do you mean an exposure of €130k? I think i see what you mean tho - if we sold the house for €230k and used a combination of our savings and a loan to pay off the outstanding balance then within a 12/24 month period we would hopefully be debt free and moving towards building a deposit. Not a nice option but definitely worth considering.
 
NegEquity said:
Brendan: do you mean an exposure of €130k? I think i see what you mean tho - if we sold the house for €230k and used a combination of our savings and a loan to pay off the outstanding balance then within a 12/24 month period we would hopefully be debt free and moving towards building a deposit. Not a nice option but definitely worth considering.
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Emotionally and psychologically difficult but not necessarily 'not a nice option'. Everyone has their own opinions on which direction house prices are going in the short to medium term. That will the proof in the pudding of where you'll stand in 24 months time.
 
As you are planning on a family then this is another cost that you need to take into account.. Why not continue renting and build up as much savings as possible.

I dont think there is an absolutely secure job out there.. anything can happen and you may end up back in your original house. So dont run into selling existing house

Best of Luck
 
NegEquity said:
Bob_tg: not sure if i would agree with you that buying individual shares is akin to gambling - my plan was to invest a set amount each month and try and build up a porfolio of well diversified shares......am i missing something?
Click to expand...

There is much written on this subject, for example:

"It is generally agreed that casinos should, in the public interest, be inaccessible and expensive. And perhaps the same is true of stock exchanges." - John Maynard Keynes

[SIZE=-1]"....there are many ways in which speculation may be unintelligent. Of these the foremost are: (1) speculating when you think you are investing; (2) speculating seriously instead of as a pastime, when you lack proper knowledge and skill for it; and (3) risking more money in speculation than you can afford to lose. . . everyone who buys a so-called "hot" common-stock issue, or makes a purchase in any way similar thereto, is either speculating or gambling.[/SIZE]" Benjamin Graham (in the Intelligent Investor)
 
You have 85K in savings and with 3K a month more you will have in 3 years another 108. (3 X12 = 36 X 3 = 108). Total 193, add in a 4th year and you're at 229.

Your negative equity currently is 130 (360 - 230). In the 3rd or 4th year from now you sell your current home and pay down the negative equity leaving you with enough for the sale costs, deposit on new home, purchase costs and baby. Try to have a minimum 10% deposit and try for a mortgage of 20 years or less.

That's if everything stays as it is currently and property does not fall further but even if it does your purchase costs will go down wiping out the affect of this. In addition you will have paid off 3 to 4 years of mortgage, unless most of it is interest currently. You may be able to move sooner depending on the market and your savings.

Do not lose your jobs, save as much as you can and you are in the best situation to get out of the negative equity and to plan for the future of most people I've seen on AAM.

The holding onto the house cannot be answered based on the details posted but as it's newly purchased for too much it's most likely not a good idea.
 
I thought everybody in the private sector had taken massive pay cuts. Are you sure there is still none coming your way?
 
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