Carrying negative equity into another house purchase

pjuegos

Hi all,

I bought a house in the peak time (2006). Well, that is not the worst problem. For personal reasons I am not happy there, and I would love to move out somewhere else.

Of course, I am in severe negative equity. Do you think banks will allow carrying the neg equity to another house purchase?

cheers

JuliusCaesar

My understanding of this is:to take out a new loan/mortgage, you have to pay off the old one. Your new borrowing has to pay off the old and have enough to buy the new. So unless you have enough equity (unlikely in neg equity) or enough capital (savings) ou cannot take out a new mortgage. Hope this explains it.

pjuegos

thanks for your reply,

Yes, I also thought that might be the case.

However, I do not understand why they are so inflexible. At the end of the day, if you can pay the legal fees associated to a house sell/purchase, and you buy a new house for the same price you sell the current one, it should not make any difference to the banks nor the tax payers...:(

Thanks again

the_syco

pjuegos wrote: »

However, I do not understand why they are so inflexible. At the end of the day, if you can pay the legal fees associated to a house sell/purchase, and you buy a new house for the same price you sell the current one, it should not make any difference to the banks nor the tax payers...:(

At the end of the day, you're trying to take out another loan, and add the excess of the existing loan to it. But if you can't pay off the existing loan, why would the bank give you a new loan?

pjuegos

I see your point the_syco. However, I have a slighlty different understanding of the situation.

Being in negative equity does not mean you can not pay your loan. The loan will be paid in the initial agreed timescale.
My point is; say you have a 350k mortgage in house A that now only worths 250k. So, 100k neg equity in house A.
If you buy house B for 250K and sell house A for same 250K, banks could (if they wanted) allow you carrying the 100k neg equity from house A to B. In this case, you will be exactly in the same financial condition; a house that worths 250k and 100k negative equity.

In addition,these measures will also stimulate ,slightly, the market, since the buyer of house A and the seller of house B will activate the market.


I will of course understand banks not allowing to sell house A for 250k and buy house B for more than that, since the mortgage will have to increase and that will truly be a new loan. However, the case I exposed it is different I think...

testicle

So you, in theory, are looking for a 350k mortgage on a 250k property?

antiskeptic

testicle wrote: »

So you, in theory, are looking for a 350k mortgage on a 250k property?

He already has a 350k mortgage on a 250k property. All he's looking to do is switch for a like-worth property.

I'd imagine a mechanism for doing same is going to have to be constructed at some point given the vast numbers of folk who are heading towards negative equity of some degree or other (if Prof. Kelly is right, I could end up there myself at some stage - having bought in 1999!)

pjuegos

Thanks antiskeptic, you summarise in a sentence what I really meant

Well, did a google search, and I am not the only one thinking like that. According to JODY CORCORAN from the Irish Independent, "A possible solution (to people stuck in the trap of negative equity) would be to allow homeowners carry negative equity into their next property"
http://www.independent.ie/national-news/no-nama-to-tackle-negative-equity-1997074.html

Apparently, the Nationwide Building Society offers this service in the UK to carry forward negative equity debt to a new property. So, it has also be done elsewhere.

I still cannot understand why you cannot have the same mortgage and neg equity in a different property, which will also result in another buyer and another seller in the market

Cheers

antiskeptic

pjuegos wrote: »

I still cannot understand why you cannot have the same mortgage and neg equity in a different property, which will also result in another buyer and another seller in the market

Consider that most people in negative equity aren't looking to move to a like-priced house - they'll be wanting to move upstream. Any mechanism that permits bringing your current negative equity with you is really going to have to deal with the requirement that the lender dole out additional funding by way of larger mortgages.

Which should be no problem (as you suggest) were it not that property-at-large is getting deeper into n.e. It's one thing for a lender to let you switch house to one of same price (a rare requirement). It's quite another to ask them to issue additional funding to purchase a still depreciating asset.

Until such time as the market levels out, I don't see any motivation/market to provide the service you require. There just won't be enough of you wanting to move sideways to warrant constructing a suitable mechanism

Victor

I don't think the banks have an absolute objection to such a transaction - you just need to convince them. Convincing them after one negative equity situation is going to be harder than the first time around.

There is no guarantee that one €250,000 property will be perceived in teh same way as another €250,000 property.

There are also transaction charges, wouldn't they be better used in paying of the negative equity?

antiskeptic

Victor wrote: »

I don't think the banks have an absolute objection to such a transaction - you just need to convince them. Convincing them after one negative equity situation is going to be harder than the first time around.

Fair point. Perhaps they'd be more open to the idea if the second property was perceived as a better bet in a falling market. So long as they consider both properties to be the same value and falling at about the same rate, they lose nothing

There are also transaction charges, wouldn't they be better used in paying of the negative equity?

The same could be said of moving house at all. Wouldn't it be better to pay off the mortgage than bear transaction charges? Not if moving is percieved more desirable than the charges taken to move it's not.

From the lenders perspective, it makes no odds - they're only going to get the mortgage in any case.

Senna

pjuegos wrote: »

Apparently, the Nationwide Building Society offers this service in the UK to carry forward negative equity debt to a new property. So, it has also be done elsewhere.

But your new mortgage is at a higher interest rate and might not even be with the Nationwide anymore, in effect it moves to a sub-prime lender and you pay a high price for the privilege.

pjuegos

Victor said"
I don't think the banks have an absolute objection to such a transaction - you just need to convince them"

Thanks, it will be difficult but there is room for hope.

antiskeptic wrote: »

Which should be no problem (as you suggest) were it not that property-at-large is getting deeper into n.e. It's one thing for a lender to let you switch house to one of same price (a rare requirement)....
... I don't see any motivation/market to provide the service you require. There just won't be enough of you wanting to move sideways to warrant constructing a suitable mechanism

I see what you mean here. However, there are many situations where people would like to move out to another property of approx same value:

• Broken relationships: the obvious case, and very common in 21st century
• Moving to another city to work: for example, the house is in Cork and your new job is in Dublin. Having neg equity in one house and renting another is not great
• Social reasons: wrong choice of neighborhood

I know, this does not represent the majority of neg equity holders. However, I do not think is a negligible minority

pjuegos

Senna wrote: »

But your new mortgage is at a higher interest rate and might not even be with the Nationwide anymore, in effect it moves to a sub-prime lender and you pay a high price for the privilege.

Sorry Senna, I don't understand. Why will the new mortgage have higher interest rate?

thanks

Senna

pjuegos wrote: »

Sorry Senna, I don't understand. Why will the new mortgage have higher interest rate?

thanks

Well this is just what i heard about one UK lender that "might" allow NE transfer, not what would happen here. But the way the banks view anything is "how can we profit from this", they could possible make a standard variable for NE loans, which would be higher than the normal SV. I think AIB aleady have a teiring system for SV's. They will use the NE as an excuse, even though the persons current loan is in NE.

e.g. if your mortgage is 50% LTV then its 2.5%, if 80% 2.75%, 100% 3%, so its possible a 120% LTV could be 4% or higher. (only speculating).

I've said it before, but some sort of NE transfer will have to be available in the future, too many people will be able to pay their mortgages, but they'll be stuck living in unsuitable houses.

pjuegos

Thanks Senna.

It seems you are right.
From: http://www.creditwritedowns.com/2009/07/nationwide-brings-back-125-ltv-mortgages.html

"Under its new arrangement, borrowers would take out a loan for 95% of the value of their new house at a fixed rate of 6.73% for three years or 7.48% for five years.They would then be able to add on the negative equity from their old home, up to another 30% of the value of the new property, at a higher fixed rate of 7.23% for three years or 7.98% for five years"


Strange way to help neg equity holders by increasing the interest rate...
Hopefully, this will not be the scheme in Ireland if one day neg equity packages are offered



Cheers

Gurgle

pjuegos wrote: »

Strange way to help neg equity holders by increasing the interest rate...
Hopefully, this will not be the scheme in Ireland if one day neg equity packages are offered

Unsecured lending to people who have a history of bad financial decisions.
tbh I'm amazed its available at any interest rate

pjuegos

Depends on the individual case.
It you switch to an approx. like-worth property, it is as unsecured lending as before doing switch

antiskeptic

pjuegos wrote: »

Strange way to help neg equity holders by increasing the interest rate...

I don't think helping people (of any hue) lies at the core of banking operations.

antiskeptic

Gurgle wrote: »

Unsecured lending to people who have a history of bad financial decisions.

What about unsecured lending from people who have a history of bad financial decisions.

pjuegos

antiskeptic wrote: »

I don't think helping people (of any hue) lies at the core of banking operations.

Of course. That is the unfortunate reality

pjuegos

antiskeptic wrote: »

What about unsecured lending from people who have a history of bad financial decisions.

Really good point antiskeptic

D3PO

Gurgle wrote: »

Unsecured lending to people who have a history of bad financial decisions.
tbh I'm amazed its available at any interest rate

Im sorry but thats a load of crap. So anybody who bought a property post 2001 has a history of bad financial decisions just because there in negative equity ?

So tell me who were you telling back in 2002 that houses were overvalued and in 2010 would be avialable for the same price so they should keep saving .....

You should have got a job as a consultant for Anglo you would have made a fortune saving them the billions they wasted and the country wouldnt be in the crapper with NAMA now. You could have worked on the side for Liam Carroll aswell.

We would have all been able to say theres Gurgle the financial saviour :rolleyes::rolleyes:

Gurgle

D3PO wrote: »

Im sorry but thats a load of crap. So anybody who bought a property post 2001 has a history of bad financial decisions just because there in negative equity ?

Anyone who bought a property up to 2005 and kept up with their repayments isn't in negative equity.

Anyone who bought a property since then (its only 5 years ago) and now wants to move made a bad decision.

D3PO wrote: »

So tell me who were you telling back in 2002 that houses were overvalued and in 2010 would be avialable for the same price so they should keep saving .....

Nobody, I've been fairly consistent with my advice: Buy nothing unless you can pay for it and you're happy to live in it for at least ten years.

The bad decision wasn't when the property was bought, but the choice of property.

We would have all been able to say theres Gurgle the financial saviour :rolleyes::rolleyes:

Or you could skim through my predictions on the housing market and see just how far off I was :P

D3PO

Gurgle wrote: »

Anyone who bought a property up to 2005 and kept up with their repayments isn't in negative equity.

Maybe for the moment but not for much longer. I bought early 2005 and taking a proper and realistic view on things im probably betwen 5 - 8% in negative equity.

so id imagine in the next year anybody who bought up to 2004 will be in neg equity.

Gurgle wrote: »

Nobody, I've been fairly consistent with my advice: Buy nothing unless you can pay for it and you're happy to live in it for at least ten years.

Good advice and something I took into consideration when buying. thankfully i bought where i wanted to live so have no intention of moving, but that said if I took this advise as literal somebody who bought in 2007 will probably be in neg equity in 2017 Id stake

Gurgle wrote: »

The bad decision wasn't when the property was bought, but the choice of property.

True in the most part but not always. Sometimes circumstances change in this reducing job market its possible somebody has to move out of necessity not becasue they want to.

Gurgle wrote: »

Or you could skim through my predictions on the housing market and see just how far off I was :P

i would do but im too lazy

Gurgle

D3PO wrote: »

im probably betwen 5 - 8% in negative equity... thankfully i bought where i wanted to live so have no intention of moving

Equity, positive or negative is irrelevant if you're living where you want to live.

D3PO wrote: »

but that said if I took this advise as literal somebody who bought in 2007 will probably be in neg equity in 2017 Id stake

Maybe, maybe not. Nobody really has a clue.
But they will have spent 10 years living in a house / location where they were happy.
So who cares?

Its not all about equity, this equity / property ladder / starter home bullshìt was invented by EAs who just want to keep us all trading up, down or sideways to keep them busy & rich.

sambuka41

Gurgle wrote: »

Nobody, I've been fairly consistent with my advice: Buy nothing unless you can pay for it and you're happy to live in it for at least ten years.

The bad decision wasn't when the property was bought, but the choice of property.

There are plenty of reasons for someone wanting to move that are out of their control. My parents loved the house i grew up in,lived there for 20 years but for at least 10 of those years our lives were made impossible by the a**hole that moved in next door. They picked a lovely house, suited their needs, close to all amenities but they ended up moving cause they couldn't hack living next door to this guy anymore. (a side note the git moved 6 months later,swear his purpose in life was to annoy us )

Not to say that everyone with negative equity should move, i think its good advice to knuckle down and get through the mortgage for as long as you can. But i seen the strain it put on my parents and it was during the boom they could have sold very easily so cant imagine the stress something like that would cause someone in neg equity.

Not saying this is OP reason just one possibility.

pjuegos

I completely agree with you sambuka41,

I made similar comments in a previous post:

pjuegos wrote: »

there are many situations where people would like to move out to another property of approx same value:

• Broken relationships: the obvious case, and very common in 21st century
• Moving to another city to work: for example, the house is in Cork and your new job is in Dublin. Having neg equity in one house and renting another is not great
• Social reasons: wrong choice of neighborhood

the story of your parents is what I called social reasons.

Gurgle wrote: »

Anyone who bought a property since then (its only 5 years ago) and now wants to move made a bad decision.

Nobody, I've been fairly consistent with my advice: Buy nothing unless you can pay for it and you're happy to live in it for at least ten years.

Gurgle, i thing your view is quite severe. Is it not that easy to plan whether you are gonna be relocated for work, love your neighbours, your wife will have twins, or you will just divorce...
Not just because life goes different than expected, we should made guilty of decissions we took in the past, which consequences escape from our control.

I remind, again, that the case I was suggesting did not imply increasing the size of the mortgage. Consequently, it is not financially irresponsible.

cheers

Gurgle

pjuegos wrote: »

Gurgle, i thing your view is quite severe. Is it not that easy to plan whether you are gonna be relocated for work, love your neighbours, your wife will have twins, or you will just divorce...

I remind, again, that the case I was suggesting did not imply increasing the size of the mortgage. Consequently, it is not financially irresponsible.

Yes, and sorry.

My ranting was really aimed at the vultures currently offering 130% mortgages at triple the going rate to people who already in it up to their eyeballs.

testicle

Gurgle wrote: »

Yes, and sorry.

My ranting was really aimed at the vultures currently offering 130% mortgages at triple the going rate to people who already in it up to their eyeballs.

Unsecured lending is always at a higher interest rate than secured.

Jo King

The mechanics of conveyancing rule out negative equity transfers at the moment. The deeds are only released on the solicitors undertaking to clear the mortgage on the existing property. The solicitor can only realistically do his when the full amount of money is in her hand. When a house in positive equity is sold the purchase money goes to the solicitor who clears the mortgage first before passing the remaining money back the the seller. That money goes with the new mortgage to purchase the next house.
In negative equity there will not be enough money from the purchaser to clear the loan. The solicitors undertaking to clear the loan can't be given unless the seller can come up with money to clear the loan.

Senna

Jo King wrote: »

The mechanics of conveyancing rule out negative equity transfers at the moment. The deeds are only released on the solicitors undertaking to clear the mortgage on the existing property. The solicitor can only realistically do his when the full amount of money is in her hand. When a house in positive equity is sold the purchase money goes to the solicitor who clears the mortgage first before passing the remaining money back the the seller. That money goes with the new mortgage to purchase the next house.
In negative equity there will not be enough money from the purchaser to clear the loan. The solicitors undertaking to clear the loan can't be given unless the seller can come up with money to clear the loan.

The COULD be worked around as the bank COULD turn the remaining balance into a personal loan, leaving no balance tied to the house when being sold.

Victor

Subprime lenders love giving money to people as the people need to give them lots more money back.

Senna wrote: »

The COULD be worked around as the bank COULD turn the remaining balance into a personal loan, leaving no balance tied to the house when being sold.

I wonder are there tax implications?

Jo King

Victor wrote: »

Subprime lenders love giving money to people as the people need to give them lots more money back.I wonder are there tax implications?

How could there be. Why would a bank want to turn a secured loan into an unsecured one? It probably could be done using some kind of bridging finance but with the hassle banks have had with solicitors undertakings recently I do not see any of them developing new products in that regard.

pjuegos

Thanks for your posts Jo King, that is very important information that I did not think of.

So, what way does it work with NationWide in the UK to carry neg equity to another house? Does the UK have a mechanism for that?

Probably this does not make sense but, can a personal loan be used just as a temporary step on the day of the conveyance?
So, on that day, neg equity is moved to a temporary "loan", and then the "loan" is added to the new mortgage? Just as a way to transfer the money from a secured loan to another secured loan


cheers

D3PO

pjuegos wrote: »

Thanks for your posts Jo King, that is very important information that I did not think of.

So, what way does it work with NationWide in the UK to carry neg equity to another house? Does the UK have a mechanism for that?

Probably this does not make sense but, can a personal loan be used just as a temporary step on the day of the conveyance?
So, on that day, neg equity is moved to a temporary "loan", and then the "loan" is added to the new mortgage? Just as a way to transfer the money from a secured loan to another secured loan


cheers

ah hiding debt with a loan from somewhere else to make finances look ok. Taken straight out of the Anglo PTSB playbook ;)

On a more serious note, getting a loan of over 100% of the value of house B to allow the clearance of debt A to drawdown debt B is essentially the same thing as your proposing.

pjuegos

D3PO wrote: »

On a more serious note, getting a loan of over 100% of the value of house B to allow the clearance of debt A to drawdown debt B is essentially the same thing as your proposing.

That was my original understanding; getting a mortgage that covers house B price + NE house A, which essentially transfers NE of house A to house B if house A and B have the same value. Is that it?
I thought that the mechanics of conveyancing would not all that?

Senna

Jo King wrote: »

How could there be. Why would a bank want to turn a secured loan into an unsecured one? It probably could be done using some kind of bridging finance but with the hassle banks have had with solicitors undertakings recently I do not see any of them developing new products in that regard.

I would say in a few years time banks will come up with a way around it, the amount of people in good jobs but bought unsuitable houses is massive and only getting larger, coupled that with examples like the OP and people who need to move for work.
But the banks will profit from it and it wont be the answer for everybody in NE wanting to move.

pjuegos

I rang the solicitor that I used to buy the house and she confirmed everything that was said in this thread. It is just not possible to carry neg equity into another house mortgage...

Jo King wrote: »

The mechanics of conveyancing rule out negative equity transfers at the moment. The deeds are only released on the solicitors undertaking to clear the mortgage on the existing property.

I heard about a case that shows how rigid the current system is; one guy in neg equity wanted to downgrade and buy a cheaper house in order to ease the mortgage payments and pay the neg equity in a shorter time range.
He was told that it was not possible to do so, even though he clearly showed being a person accepting his difficult financial situation and trying to find a responsible solution.

Amhran Nua

antiskeptic wrote: »

There just won't be enough of you wanting to move sideways to warrant constructing a suitable mechanism

Actually I think that you can buy a better/larger property for €250k today than you could buy for €350k in 2006. This is especially relevant in the case of couples stuck in shoeboxes that might have kids on the way, an important social issue that we'll need to face sooner or later.

Jo King wrote: »

The mechanics of conveyancing rule out negative equity transfers at the moment.

Its not that hard to change legislation.

Jo King

Amhran Nua wrote: »

Its not that hard to change legislation.

How much of it have you changed? There have been legislative changes to property transfers going back hundreds of years. many have not had the intended effect.

pjuegos

Apparently, one of the budget points was:
"There will be some relief for householders in negative equity who want to downsize with a new stamp duty relief scheme"
http://www.herald.ie/national-news/lenihans-budget-misery-for-all-but-cigarettes-and-pint-escape-hikes-2450874.html

How can that be if the mechanics of conveyancing do not currently allow negative equity transfers?

cheers