Why do the banks not do negative equity mortgages?
- Thread starter CrazyOne
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R
RIAD_BSC
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Brendan Burgess
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Yes "no"'
There are two parties here. The borrower and the lender.
The borrower starts with a mortgage of €375k and €50k cash i.e. net borrowings of €325k.
They end up with a mortgage of €425k.
Their net borrowings have increased by €100k.
The borrower is responsible for the mortgage, so the €50k is very relevant.
The borrower is in a much riskier position after the trade-up. So, therefore, the lender is also.
Interest rates are expected to rise.
Income tax may well rise and those over €100k may well get hit.
We may not be at the bottom of the market as you have asserted.
And just maybe one of you may have a period of unemployment.
In a few years time, you will search the old posts on askaboutmoney and be very grateful to the Central Bank for preventing the banks from excessive lending.
There are two parties here. The borrower and the lender.
The borrower starts with a mortgage of €375k and €50k cash i.e. net borrowings of €325k.
They end up with a mortgage of €425k.
Their net borrowings have increased by €100k.
The borrower is responsible for the mortgage, so the €50k is very relevant.
The borrower is in a much riskier position after the trade-up. So, therefore, the lender is also.
And this is the issue. €425k for a couple who are trading up to have expensive children is excessive in my language, at least. Sure a few years ago, when the lenders were routinely giving out mortgages of 5 times salaries, 3 times salary doesn't look excessive. But it is excessive. It leaves this family and the bank under pressure for a long time to come.
Interest rates are expected to rise.
Income tax may well rise and those over €100k may well get hit.
We may not be at the bottom of the market as you have asserted.
And just maybe one of you may have a period of unemployment.
In a few years time, you will search the old posts on askaboutmoney and be very grateful to the Central Bank for preventing the banks from excessive lending.
R
RIAD_BSC
Guest
The lender is not in a riskier position after the trade up. How did you reach that conclusion? Before the trade up, it had an unsecured exposure of 175k. Now it has an unsecured exposure of 125k. The borrower is no more likely to lose their job than they were before they traded up. Your point about people earning over 100k being hit with extra taxes is irrelevant. The people in the example had a joint income of 150k. If they were both on equal wages of 75k each, it doesn't matter a jot to them what extra taxes are heaped on those earning over 100k.
The fact remains that the bank has better security after the trade up. It has made sure that it is now the only one with a claim on what was once the 50k in cash (because it is now tied up in the security of the house). Before the trade up, all of the borrowers other creditors would have claim on that 50k in the event of a default. The bank has drastically improved its position. That's not opinion. It is mathematical fact.
This debate is going round in circles. We should finish it up. Brendan, you are not a banker (and neither am I). If a NE loan passes up-to-date stringent bank stress tests, then there is no reason whatsoever why it should be prevented from making that loan. It doesn't matter what you, I or anybody else says.
Top of the head assertions about whether or not a loan is excessive, such as the ones on this thread, don't count for anything. There are stress tests to calculate these sort of things. If a loan passes the test, who are you to say the loan should not be offered?
Anyway, it sounds like, from what you posted earlier, the Central Bank's position now sits somewhere closer to mine than it does to yours (that NE loans are suitable in certain limited circumstances). That's good enough for me.
I won't address your final sentence, because I find it deliberately patronising.
Can we now just call a truce?
The fact remains that the bank has better security after the trade up. It has made sure that it is now the only one with a claim on what was once the 50k in cash (because it is now tied up in the security of the house). Before the trade up, all of the borrowers other creditors would have claim on that 50k in the event of a default. The bank has drastically improved its position. That's not opinion. It is mathematical fact.
This debate is going round in circles. We should finish it up. Brendan, you are not a banker (and neither am I). If a NE loan passes up-to-date stringent bank stress tests, then there is no reason whatsoever why it should be prevented from making that loan. It doesn't matter what you, I or anybody else says.
Top of the head assertions about whether or not a loan is excessive, such as the ones on this thread, don't count for anything. There are stress tests to calculate these sort of things. If a loan passes the test, who are you to say the loan should not be offered?
Anyway, it sounds like, from what you posted earlier, the Central Bank's position now sits somewhere closer to mine than it does to yours (that NE loans are suitable in certain limited circumstances). That's good enough for me.
I won't address your final sentence, because I find it deliberately patronising.
Can we now just call a truce?
Brendan Burgess
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Hi Riad
Apologies. It was not meant to be patronising. It's just very interesting to look back at some of the posts from 2005 and 2006, where people were absolutely indignant that the banks would not lend them 5 times their salary and 100% mortgages. Those people are looking back now and are presumably very relieved, while others, not you, are looking for debt forgiveness because of the reckless lending of the banks.
Brendan
I simply don't agree. The couple in question are less likely to default on a net borrowings which are €100k lower. The negative equity on the property is lower, of course, but the new loan is much more likely to default.
I was responding to this assertion by you:
The loan criteria used to be 2.5 times "his" salary plus one times her salary. That would suggest a loan for your couple of €262k. So 425k seems excessive to me. It's not a top of the head assertion. It's a calculation.
Apologies. It was not meant to be patronising. It's just very interesting to look back at some of the posts from 2005 and 2006, where people were absolutely indignant that the banks would not lend them 5 times their salary and 100% mortgages. Those people are looking back now and are presumably very relieved, while others, not you, are looking for debt forgiveness because of the reckless lending of the banks.
Brendan
Hi Brendan
I know that we're not permitted to discuss the future movement of house prices.
However, it's just not credible to compare (either directly or indirectly) the present situation with that of five years ago. The collapse that we've witnessed could not be replicated.
Also, the people you've referred to above were clearly increasing their indebtedness by taking on 100% mortgages. I believe that we disagree on whether someone availing of a "negative equity mortgage" is increasing their indebtedness. However, irrespective of your own view, I'm sure that you would agree that the argument is far less clear cut than it was five years ago.
R
RIAD_BSC
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This is my last post on this one - honestly!
The couple's likelihood of defaulting is much more closely related to their income than their loan amount. So you can't just automatically say that their 425k loan would be more likely to default than a 375k loan. That just doesn't make any sense whatsoever.
In any case, the repayments on a 425k loan over an average mortgage period (25 years?) are not in a much different quantum to the repayments on their original 400k mortgage (which they have managed very well thus far, and also managed to save 50k). They would be only slightly higher. Going from the repayments on a 400k loan to repayments on a 425k loan will not be a game changer for this couple. And they are no more likely to default, in any meaningful sense.
As for your final point, I mostly agree with you on that one. People's loan expectatons were savage during the boom. I'm happy that I borrowed within a range I could afford (the bank offered me 30% more than I borrowed).
However, I wouldn't damn people to hell for taking out 100% mortgages during the boom. In my own case, I took a financial decision to go 100% because I thought it made sense at the time. Back then, house prices were rising far faster than I was capable of saving a deposit. If I saved 20k one year, the house price would rise 30k. So I took a gamble and went 100% to nal down the price. It backfired spectacularly, but I don't feel too bad as there was no way I could have forseen what happened.
C'est la vie.....
Oscaresque
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Honestly, would you choose to have a child in a house/apartment where they could not have a bedroom? Bearing in mind that babies become children, become teenagers, become adults....?
Bedroom space is just the thin end of the wedge.
It's washing and drying clothes and general storage that are the main issues.
Normally, it takes one day to dry clothes outside. It takes at least four times as long to dry clothes indoors and there are all sorts of associated problems with damp as a result. Plus you essentially have to give up a room (which you don't actually have). If you try and stick your clothes outside on a balcony, you'll start receiving threatening letters from the management company.
Irrespective of the current climate, there has to be demand in the medium term for "family friendly" apartments such as those you see on the Continent and further afield.
I have a sister in law who lives with her 9 year old son in an apartment and I've always thought of it as a sad way to grow up. The apartment for the most part is full of adults who don't even acknowledge each other in the hallways. The child can't call for his friends down the road or vice versa like I would have done as a child because it would mean coming down from the 3rd floor and then crossing a busy road. He has nowhere to ride his bike or other outdoor activities. Even Hallowe'en isn't the same, any doors he knocks on in his block are either empty or the people inside aren't interested in entertaining a child at Hallowe'en.
Memories I take for granted growing up this child won't experience, he is paying the price for a decision somebody else made.
G
Guest105
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I am not advocating it on a long time basis but as a shorterm solution. I had two kids in a one bedroom rented flat many years ago and while it wasn't ideal we didn't have much choice. However, despite having low paid jobs at the time we saved very hard and after a few years had that all important deposit for a house. In those days we knew the value of money and banks didnt exactly throw it out like they did here in recent years.
I find it quite amusing that young couples on this thread are on €100,000 + joint incomes and yet they are not prepared to save and pay off their negative equity.
truthseeker
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You are completely missing the point. Im sure anyone would be willing to have children in a small apartment, low paid jobs, and save for the all important deposit for a house. What you are missing is that these couples also have massive negative equity so what you propose is not a viable short term solution - the NE prevents them from doing what you suggest above. They can save away and have a deposit - but what are they going to do about the 50k/100k/150k that still exists after they sell the small apartment? Its going to eat their deposit AND leave them with a shortfall.
This is just patronising. There are plenty of young couples (or single people) out there who saved like mad to get a deposit for a property. Im one of them. I went without many things to get that money together, there were many times in the week before I was paid that I chose beans on toast for dinner rather than dip into savings. Its disgraceful that people have such a smug and patronising attitude to people like me who saved and did not avail of easy credit or live any kind of luxurious lifestyle. I drove the same secondhand car for years, it was falling to pieces.
After all that I bought somewhere within my means AT THE TIME. Now I have massive NE, a large paycut, government taxes and levies, my OH is out of work and I may be facing the same - I could not have known these things would happen. How dare you assume that someone like me does not know the value of money. Its no wonder the country is in the state its in with attitudes like this.
I'm part of the NE generation. we bought a duplex at the height of the boom while I'm aware we made a huge mistake , I dont think we were greedy. We have a mortgage (not 100%) of 300k while we were offered over 400k..we have no issues in paying back the mortgage and we have 80k savings. our NE is 150k.we don't have any other debts, don't use credit cards and bought two cars a with cash. while it wasn't planned we had a daughter(and I'm so glad it happened otherwise we'd never have the guts to do it). . My partner lost his job in 2008, but thank god never stayed home, he had two temporary contracts and finally got a permanent job , with a big salary reduction though. Now my job doesn't look safe and I could lose it in the next couple of years. I dont want any debt forgiveness and I think eventually we'll end up renting the apartment and renting a house ourselves, but I have to admit we had a lot to deal with and being described as ' greedy' really annoys me. When we bought the apt we didn't think we were going to have kids for at least 10 years and we didn't think we were going to lose our jobs either.
Brendan Burgess
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Hi truthseeker
To be fair to cashier, there is a huge difference between general attitudes to borrowing today and attitudes some years ago.
For example, Riad said
I have a very different view from Riad here. Yet, his assumption is that borrowing three times your joint salaries while already in negative equity is not excessive in anybody's language. He might want to take that risk. I certainly would be very wary of it.
So I think that Cashier's comments that we have generally lost the understanding of the value of money is correct.
Brendan
To be fair to cashier, there is a huge difference between general attitudes to borrowing today and attitudes some years ago.
For example, Riad said
I have a very different view from Riad here. Yet, his assumption is that borrowing three times your joint salaries while already in negative equity is not excessive in anybody's language. He might want to take that risk. I certainly would be very wary of it.
So I think that Cashier's comments that we have generally lost the understanding of the value of money is correct.
Brendan
concerning living in an apartment with a child I think is duable, we have two bedrooms and two bathrooms though. Not having a garden doesn't really bother me. Myself and my daughter are never home before 6 pm in the afternoon therefore I dont think she'd use it during the week. while w/ends we have some quality time together and we are out most of the day.
Hi Riad,
Can we go back on this bit. They owe 375K and it will take decades to pay off the NE of 175?
175 less 50 savings is 125. How much of the salaries of 150K is spent on the mortgage annually? I find it incredibly hard to understand how this cannot be tackled in say 3 years at 40K extra a year?
You should not back out of the debate, it's very interesting and relevant for many people, I'd like to be convinced. For Leaky1's case I can see it but not for this case.
In relation to Brendan's argument on the 2.5 times salary plus 1 time spouse. This was a tried and tested safe method in the past. But interest rates are low, and someone on 150K can go to more than 2.5 times plus 1 as they have more disposable income.
Banks don't give out money for social reasons. Money is arithmetic purely and simply for them. If they gave out money for social reasons they would be bankrupt.
And risking the wrath of all, it's a pity more people didn't do the arithmetic themselves in the first place.
truthseeker
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There is a huge difference - but this difference needs to be looked at in context. Some years ago it was more common for only one partner to work, mammies tended to stay at home, there was only one salary in the family. People did not have such high levels of professional qualifications, their salary expectations were lower.
Attitudes will always change with time but it is frustrating for someone like me (and no doubt others in NE) who was actually sensible and did not over extend themselves to find themselves being dismissed with 'people these days dont know the value of money' - when it is just not true.
If I had held off buying a property because of the bubble I would only now be in a position to buy and possibly unable to get a mortgage due to reduced earnings etc.... So maybe in a position where I could have been in my 40s before being able to buy a home - do people really think that entire generations were going to wait until their 40s to buy homes? It just doesnt make any sense.
Yea, I mean everybody but truth be told the only ones left to pay are?