What is negative equity?
Negative equity simply means that your mortgage is higher than the value of your property.
If you wish to sell your property, negative equity can be a concern. If, however, you are up to date with your mortgage and secured loan repayments, negative equity should not be considered as an immediate problem.
Nearly one in three mortgage holders will be in negative equity by the end of 2010, with another 57,000 expected to go into negative equity in 2011 if house prices fall further.
Many of those in negative equity will be those who got mortgages from 2004 when 100% became widely available, but there are many others with top-up mortgages who now also owe more than the value of their home.
In December 2010 property in Dublin was being valued at around €300 to €350 per square foot. If you know the size of your home, you will be able to work out the value it might achieve if it were for sale and how it compares to your mortgage.
But for most, it's a pointless exercise. Negative equity only becomes a problem if you want to sell.
If you do want to sell, talk to your bank. If you have a good history with the bank they may be willing to do a deal allowing you to roll up your debt with a new property. Banks aren’t advertising this, but there are reports that they are doing this.
Trading up in a recession
Think about how the property collapse could actually benefit you – could you move to a bigger property that is cheaper?
Let’s say you have a €300,000 mortgage on a shoe-box apartment in a Dublin's Docklands You have a 100% mortgage and the property is only worth €250,000. If you sell you’d end up owing the bank €50,000.
You could talk to the bank about buying a property outside the city and carrying over the negative equity – ie buy a place for €250,000 and carry with you the €50,000 debt. That way your mortgage is the same level, but you have a bigger place and a chance of moving out of negative equity in the long term.
An ESRI report in 2010 predicted that first-time buyers (with 90%, 95%, 100% mortgages) would be in the red for 10 years. This is based on property prices in 2010 being 30% lower than they were in the peak at 2007.
If the drop between 2007 and the end of 2010 is 50%, as many as 350,000 homeowners could end up in negative equity, according to the ESRI’s policy paper, ‘Negative Equity in the Irish Housing Market’ published in 2010.
"First-time buyers with a high loan-to-value ratio will not move back into positive equity until after 2020," the report says.
Economists such as Morgan Kelly in UCD say the negative equity trap could exist for even longer. He reckons it could be 10 years (starting from 2008) for house prices to start showing significant gains again.
Negative-equity mortgages
Negative-equity mortgages allow a home-owner to sell their home (at a loss) and move the entire mortgage relating to the older property to their new property.
They have been reintroduced in the UK and three institutions in Ireland – Bank of Ireland, ESB and Permanent TSB – are reportedly preparing to launch this product.
They are controversial, but are seen as a potential lifeline for first-time buyers trapped in small apartments that are unlikely, ever, to recover in value.
Under these mortgages customers can transfer their existing mortgage to a property of equal or lower value than their current home. After the housing price collapse, it could mean homeowners being able to move to a larger property with the same or lower value to their existing home - an attractive option for some, particularly those with growing families.
Related stories:
December 2, 2010: Moodys says negative equity will drive mortgage defaults
November 19, 2010: Distressed home-owners urged to contact lender
November 17, 2010: Debt forgiveness not recommended by government debt group
