Bank of Ireland just launched a couple of negative equity mortgages… Negative Equity Mortgages… It’s hard to imagine anyone boucing out of the bank with a big grin after signing up to a Negative Equity Mortgage. It’s bad enough finding yourself in negative equity, but willingly signing up to a whole new underwater loan?
Bank of Ireland says that these – let’s call them NEMs – “will allow much greater numbers of customers in negative equity to move home.” But in the very first line of their press release, they say that they’ve put these products together “in line with Central Bank of Ireland guidelines.” I may be reading between the lines here, but that seems to suggest a certain ambivalence about the whole thing.
There’s a Trade Up NEM, purportedly designed for people who want a bigger place in a nicer ‘hood with better facilities (don’t we all). And then there’s a Trade Down NEM for folks who, well, want a place that they can buy for cheaper than they can sell their current home.
To be approved for a NEM, customers will have to “undergo a full assessment and will have demonstrated that they can afford the new mortgage.” And the new mortgage will of course be substantially bigger than the old one – on account of all that negative equity being lumped in with the new loan.
Bank of Ireland gave examples of the types of customers that their new mortgages would suit. Here’s one:
“A couple bought a 2 bedroom starter home in 2006 for €350,000 with a mortgage of €322,000.”
Back in 2006, the banks were commonly issuing 100 per cent plus mortgages to first time buyers – but we’ll roll with Bank of Ireland’s 92% example – a €322,000 mortgage it is.
“Their existing home is now valued at €175,000 and the balance on their mortgage is now €290,000.”
That’s a 50% drop. 2006 was the peak of the market, and most pundits say that the fall has been more in the order of 60%, but in the absence of any current price transparency in the housing market – we’ll roll with Bank of Ireland’s assessment again.
“Their new property is costing €400,000, and 90% LTV would equate to €360,000. This new feature would allow this couple to borrow, €475,000, or 119% LTV, covering both 90% LTV of their new property and the shortfall from the sale of their starter home (subject to affordability and underwriting assessment).”
And this is where the whole NEM thing begins to look very limiting...Why?
Well, first the couple will have to show Bank of Ireland that they have the €40,000 deposit needed for the new home.
Then there’s the approval process which is likely to be rigorous to say the least. The bank will have to give their blessing on the sale of the existing home, the couple will have to figure out the minimum price it must achieve, and then the maximum price that can be paid for the new one. Which of course will be determined by the size of the new loan the bank is willing to issue.
Next, the couple needs to sell their existing home. No mean feat in this market. And trying to achieve a predetermined price is not going to be easy either.
And of course, they have to to find their €400,000 new home.
A property chain like this is difficult enough to pull off in good times, but let’s say our couple is able to do all these things. Find €40K in cash, get approval for a NEM, flog their two-bed starter home for €175,000, find and buy a new home for €400,000.
Well, our couple will be increasing their debt from €290,000 to €475,000. That’s an increase of 64% at a time when one in five Irish mortgages are already in trouble. (see more on mortgage arrears here)
You could say that the monthly repayment would not go up by 64% because the original loan was for €322,000. And you’d be right. If the bank were to keep all things the same, like the interest rate and the term, then it would mean an increase of 48% in the loan. Which is still massive…
It would mean that if our couple is paying around €1,500 per month to service their current mortgage, they’d be increasing that to around €2,200. Again, pretty substantial.
But we know that everything will not stay the same. Bank of Ireland have already said that they will not allow customers to keep trackers; even for the negative equity part of the loan. Bank of Ireland don't seem to have published the interest rate that they will be charging for these NEMs either. It's not with their press release and it's not on their mortgage rates web page. Their standard variable is 3.75% but I’m guessing that the NEM rate will be higher because, despite calls to the bank's mortgage services and customer care numbers, the agents couldn't tell me what it is.
With nearly 50 per cent of mortgage holders stuck in negative equity it would be great if a scheme like this helped people sell up and move, if and when they need to. There are plenty of people out there who need more space or want to move for a new job. And Bank of Ireland does say that these NEMs “will allow much greater numbers of customers in negative equity to move home.” But I’m just not seeing great numbers of people suddenly liberated from unsuitable housing. There are too many hoops to jump through. And what young couple in a two bedroom starter home has €40,000 in cash and can also afford to increase their monthly payments by 50%?
Until now if you were in negative equity, you were not allowed to sell by your lender unless you could clear the shortfall, and my guess is that not too much will change with the introduction of these loans. My guess is that NEMs will be carefully issued to a select few with income security and substantial means.
Maybe I’m wrong. Maybe in a year, we'll look back at the launch of NEMs as a turning point for the property market... but I'm not holding my breath.