FIVE YEARS into the bursting of the property bubble, and there is no relief in sight for the thousands of homeowners who splashed out inordinate amounts of cash at the height of the boom to buy a property.
People are mired in negative equity and may be facing a change in circumstances – being stuck in an undersized apartment or inconvenient location is a common problem all around the country. But while there may be no ideal solution, here are five options to consider.
1 SWAP A TWO-BED FOR A FOUR-BED
PLUS:
IT MAY not be ideal, but renting out your own property and in turn renting another property for yourself can give you some valuable breathing space, particularly if you have a small family. For example, if you bought a two-bed apartment for €400,000 in Dublin during the boom, it is likely that you might have a mortgage of about €1,400 a month. While renting your property might only bring in up to €1,200, leaving you with a €200 shortfall, if you can afford this plus an extra couple of hundred, it could buy you a lot more space. According to myhome.ie, a four-bedroom house in Raheny, Dublin 5, for example, will set you back about €1,400 a month to rent.
MINUS:
IN URBAN areas there can be a shortage of well-maintained family homes. “There is a short supply of bigger houses,” agrees Mary McGarry-Murphy, director of letting and management services with Wyse. She has seen some examples of people renting out their homes and letting another property to live in. However, she has seen this most commonly when people emigrate, as the tax implications of doing so can put people off. While you will only be liable for one €100 household charge, any rental income earned will be subject to income tax. Since the reduction in mortgage interest relief to 75 per cent, this can make working out the sums that bit tighter. Not only that, but renting out your home can affect how much of a capital gains tax exemption you might be entitled to when you go to sell it.
"The other thing is that for people who got tracker mortgages, but their home then becomes an investment property, they might lose this tracker," notes McGarry-Murphy. In the past, Bank of Ireland, for example, has confirmed to Pricewatch that it would not do so in such a scenario, but other lenders may not be so flexible.
2 MAXIMISE YOUR INCOME AND PAY DOWN THE DEBT
PLUS: PAYING DOWN your mortgage debt might be the quickest way of releasing you from the negative equity trap – and, unlike depending on the vagaries of the market, it means that you're more in control of your destiny. If you can afford to overpay your mortgage, you could really make a difference. As Declan Faulkner, general manager of Faulkner Finance advises, if you're on a tracker, paying €500 a month and the European Central Bank pushes down interest rates, you should keep your repayment at €500. This means that you will pay less interest and more principal. "It's always good financial advice to pay the bank back less interest, if you can afford to do it," he notes.
One way of boosting your income is by taking advantage of the asset that has got you in this position in the first place – your home. While renting out a room may never have been a priority for you, it might be time to consider it. Another option is to move back home, if your parents are willing to take you, putting your rental income plus the money you would have spent on the mortgage together to pay down the debt.
Specialist accommodation site Airbnb.comhas also attracted considerable interest from Irish homeowners looking to bring in some extra cash, with over 500 users registered. If you have a spare room, or can stay somewhere else for short periods, you can use the website to let your property, earning on average about $50 per room a night. And if you're heading off for two weeks over the summer, letting your home while you're away might also be an option.
MINUS: DEPENDING ON how you earn your income, there might be a related tax liability, which can reduce its benefit – particularly if you're a higher-rate taxpayer. For example, according to the Revenue Commissioners, while you can earn €10,000 a year tax-free under the rent-a-room scheme, this does not apply to lettings on a temporary basis such as through Airbnb, as the property is being used as guest accommodation rather than for residential purposes.
Paying down your mortgage may only be a possibility for those on tracker mortgages as those on fixed mortgages will incur a penalty if they try to overpay, while those on variable rates may be unlikely to have any spare cash, given the substantial hike in rates in recent years. And whatever the financial benefits of doing so, sharing your home with strangers is just not for everybody.
3 CONSIDER LOOKING FOR A DEBT WRITE-DOWN
PLUS:DEPENDING ON the severity of your situation, you might be in line to take advantage of the recently announced Personal Insolvency Bill. Under the proposed personal-insolvency agreement (PIA), which applies to secured debt such as mortgages, it might be possible to agree a debt reduction with your lender if you can no longer afford to meet your mortgage repayments. So, if your outstanding mortgage is €360,000, and your house is only worth €200,000, the lender might cut the debt to a level which you can afford to repay.
MINUS :To qualify for a PIA, you must be unable to meet your debts as they fall due, and it must be unlikely that this will change over the next five years. So, for it to be of benefit you must be in a really bad way financially. As such, it won't be of much help to those meeting their repayments but looking for a way out nonetheless.
Another issue is that it is not binding on the banks to agree with any proposal put to them – they can still veto it, and it will likely affect your credit rating going forward, making it more difficult to borrow in the future.
4 HOPE THAT THE MARKET WILL TURN
PLUS:The simplest way out of the negative equity trap for many is to hope that the market will start to improve. Just sitting tight and waiting for things to turn could mean that those who are currently unable to sell would be in a position to do so. Indeed if prices stabilised this year, and started to grow next year, it could relieve the situation for many.
For example, if your house has fallen in value by 50 per cent to €200,000, and you bought during the boom, you are likely stuck in negative equity of the order of about €140,000, once deposits, amount paid down to date etc, are subtracted. If prices were to rise by 5 per cent, this could reduce your negative equity burden by €10,000; or €20,000 if they increased by 10 per cent and so on. “Most will just have to wait it out and hopefully the market will recover at some point,” notes Faulkner.
MINUS:YOU MIGHT be waiting for quite some time to see prices rise by enough to bring your underwater mortgage above the surface. Given that the value of house prices around the country has fallen by at least 50 per cent – and in many cases more – for house prices to return to their glory days will require a 100 per cent increase in values.
And, of course, a strong possibility is that prices might continue to fall. According to the Central Statistics Office, prices fell by 16.7 per cent in 2011 alone, and there are no signs of an improvement anytime soon. “This year will be very difficult again,” says McGarry-Murphy.
5 LOOK FOR A NEGATIVE EQUITY MORTGAGE
PLUS:POPULARISED IN the UK during the negative equity crisis of the early 1990s, negative equity mortgages allow people to carry their debt with them to a new mortgage, thereby allowing them to sell their homes and move on.
Given the decline in prices, this might be attractive for some. “If you have the opportunity to buy, its definitely the time to do so. There is tremendous value out there, and it might be now possible to buy in the locations you would have liked originally,” says McGarry-Murphy. According to Faulkner, he gets frequent calls from those mired in underwater mortgages looking for just such a solution. Now both Bank of Ireland and Permanent TSB appear to have one.
Both banks have been cleared by the Central Bank to offer a negative equity mortgage, which means that for people who are effectively trapped in their homes, they will be able to sell and carry their debt with them.
MINUS:Buying a property while holding onto your original one, is really likely to be only an option for the most credit worthy of borrowers. "You would need two really good incomes, a really good savings record, a job thats very secure – and the piece (of negative equity) that youre bringing with you wouldnt want to be too big. If youre in €100,000 of negative equity for example, you havent a hope," advises Faulkner.
Such products are likely to be offered based on customer affordability and will be limited. And there will be a cost – its understood that for home owners taking up this offer, if they have been availing of low interest rates on a tracker mortgage, they are likely to lose this. Going down this route might also force you into becoming a landlord when youd rather not, and even if you manage to get a bank to allow you to carry your debt, you would still be stuck with it – this does nothing to actually clear your negative equity.
