Advice from people in the know!!!

Ms2011

I will hopefully be coming into about 100k in the next 6 months and was wondering how best to use it. Here is some background:
My OH and I have always dreamed of having a little detached house in the country with some land (1/2 acre or so). We currently have a house which we bought in 2009 for 262k, we still owe 255k and it is now worth about 160-170k.
Our idea is to buy something that needs a bit of work for the 100k and do the work while living in our current house, then when all the work is done on the new house, sell our current house. By our estimates we will still owe about 90k on our current house after we sell it, how do you go about paying this negative equity, can you continue to pay it back to the bank like a mortgage?
If we could do this we could have our dream house in the country, have a house to live in while doing it up and end up with just a 90k 'mortgage', does this make sense or is it even possible?

TwoShedsJackson

What you want to do is not really possible. The bank hold the deeds to your house and will not release them to enable a sale to go through unless the mortgage is discharged at the same time.

Seeing as the sale won't cover the mortgage, you would also need to pay the rest of the negative equity immediately. So if you are about 90k in negative equity you will have to pay that out of the 100k if and when you come into it.

That only leaves 10k so your best case would be selling your current place, that leaves you with the deposit for a mortgage on the new place and that's it.

tanyabond

Two sheds, are you saying a person with a mortgage can not purchase any additional property for cash?

Mr. Loverman

tanyabond wrote: »

Two sheds, are you saying a person with a mortgage can not purchase any additional property for cash?

No, he's saying you can't sell a property which is in 90k negative equity, unless you have 90k in cash lying around which you can use to pay off the remaining mortgage.

Mr. Loverman

Ms2011 wrote: »

I will hopefully be coming into about 100k in the next 6 months and was wondering how best to use it. Here is some background:
My OH and I have always dreamed of having a little detached house in the country with some land (1/2 acre or so). We currently have a house which we bought in 2009 for 262k, we still owe 255k and it is now worth about 160-170k.
Our idea is to buy something that needs a bit of work for the 100k and do the work while living in our current house, then when all the work is done on the new house, sell our current house. By our estimates we will still owe about 90k on our current house after we sell it, how do you go about paying this negative equity, can you continue to pay it back to the bank like a mortgage?
If we could do this we could have our dream house in the country, have a house to live in while doing it up and end up with just a 90k 'mortgage', does this make sense or is it even possible?

You're in a tough situation.

It is likely house prices will continue to drop for a number of years. (Why? Because all the evidence suggests Ireland is ****ed beyond repair).

If you hang on for a few more years you're house will be in even more negative equity.

If I were you I would sell the house now, use the 100k to pay off the negative equity, and then start afresh with a new small mortgage for your new property.

This is still a horrible option though.

But you only get one life so if you'd be happier in the smaller property with a bit of land, go for it.

Senna

If i were you, I'd sell now, use the 100k to pay off the NE and rent till the country finds some stability. Your 100k will cover the NE now, but once interest rates start rising (thats begins next month), you could quickly find out your 100k wont come near to covering the NE.
When the market bottoms out, houses like the one you want (small and in the countryside) will probably be a lot cheaper and realisticly the 100k price tag you're thinking of now will be more like 50k and that'll be a house you can move into straight away.

Putting the 100k into the NE might seem like a waste now, but in a years time if your 100k doesn't cover the NE, then having it would enable you to move property.

TwoShedsJackson

tanyabond wrote: »

Two sheds, are you saying a person with a mortgage can not purchase any additional property for cash?

You can purchase any additional property you like for cash, but you would need more cash than the OP mentions. If they had 200k to spare they could do it, 90k to pay off the negative equity and the other 110k to buy the new house, but if they want to fix it up etc. that's going to cost more again.

D3PO

Totally agree with twosheds here.

Id saw either sell now use the 100k to pay off the neg equity and start afresh

or the other option you have assuming the sums add up.

Buy the country house and do it up as you want, but you will then have to consider renting the hosue you currently have out as an investment property.

DublinDilbert

Why not look for a property out in the country with the 100k cash, you should soon get something for that. Also being a cash buyer will help. Then rent out your own place... This assumes you have income to cover the existing mortgage if the place is empty 2 months per year.

The_Conductor

DublinDilbert wrote: »

Why not look for a property out in the country with the 100k cash, you should soon get something for that. Also being a cash buyer will help. Then rent out your own place... This assumes you have income to cover the existing mortgage if the place is empty 2 months per year.

The issue here- is the winding down of mortgage interest as an allowable expense for landlords- so the potential tax implications of renting out the original house- alongside a higher mortgage interest rate as a non-owner-occupier, would need to be factored into the equation. Its entirely probable that you'd end up having to subsidise the mortgage on the original house, in perpetuity, or at least until you managed to offload it somehow (at which stage you'd still have the negative equity issue to deal with)........

Unfortunately I have to agree with the summation that our country is hopelessly screwed for the foreseeable future.

Ms2011

TwoShedsJackson wrote: »

The bank hold the deeds to your house and will not release them to enable a sale to go through unless the mortgage is discharged at the same time.

So what happens in the cases where people can no longer afford their houses and the banks take them back, don't the banks have to sell them at a loss and recoup the balance from the home owners???
Sorry forgive my naivety, I'm not overly familar with this whole area.

Senna

Ms2011 wrote: »

So what happens in the cases where people can no longer afford their houses and the banks take them back, don't the banks have to sell them at a loss and recoup the balance from the home owners???

Yes, the home-owner is liable for the outstanding debt.

Ms2011

Senna wrote: »

Yes, the home-owner is liable for the outstanding debt.

So how to they recoup the debt is the bank able to seize assets or do they have to draw up a method of payment with the homeowners???

The_Conductor

Ms2011 wrote: »

So how to they recoup the debt is the bank able to seize assets or do they have to draw up a method of payment with the homeowners???

The bank can seize assets, and purloin any income the person may have, until such time as the debt is satisfied.

Ireland's laws governing dealing with debts- and personal bankruptcies- is based on Victorian law (to the extent that we still have debtors prisons on our statute books).

Idbatterim

Op i read an article recently about a couple who wanted to downsize, they bought another property and in mean time put their home on the market, in the mean time their first home dropped so much in value, that both houses had to be sold to cover the mortgage!

Ms2011

Idbatterim wrote: »

Op i read an article recently about a couple who wanted to downsize, they bought another property and in mean time put their home on the market, in the mean time their first home dropped so much in value, that both houses had to be sold to cover the mortgage!

That's why I'm considering getting a close family member buy our new house for cash in their name, we'll see how things go but it maybe our last avenue to go down

Idbatterim

Im guessing the time taken to do up new house would be anywhere from 3-9 months. Its a gamble either way. But not the same as saying you will sell current house in 2-3 years, when nobody knows exactly how bad things will be... In the current climate, I think it really is a gamble though, why not just pay off mortgage, be debt free. and have a few k left over. That 250k or whatever it is, will really be possibly double that by the time you pay it back. I dont know what kind of mortgage you have currently, but the ECB are expected to raise their rates 3 times this year, that not to mention what the banks may raise theirs by... Could you really put a value on being debt free, not being a slave to the bank, the constant worry? In the current climate, god knows how long it could take to sell your house, unless you put it up for a knockdown rate, in which case the negative equity will be even more than you have calculated...

chicken fingers

Youve got a house with a big loan thats currently 90 grand in negative equity, you´re about to get a lump sum and you would risk the whole amount on a country house that you will have to spend more money to do it up? What if god forbit somebody gets fired. Or if your houses value falls further? Be very careful before you get into further debt.

Ms2011

chicken fingers wrote: »

Youve got a house with a big loan thats currently 90 grand in negative equity, you´re about to get a lump sum and you would risk the whole amount on a country house that you will have to spend more money to do it up? What if god forbit somebody gets fired. Or if your houses value falls further? Be very careful before you get into further debt.

Our mortgage is our only debt, we have not other debt, we own both our cars outright and have no other loans, if someone were to get fired we could still afford our current mortgage.
We went to have a look at a house today, it's on the market for 99k but it's been there awhile so if we do put in a bid for it it will be no more than 70k, keeping 30k as a 'rainy day fund'. I wouldn't be taking out any loans to do the house up, my OH if v.handy and can do much of the work himself, materials I would get week by week as I could afford them.
We have decided that IF we do decide to buy a 'fixer upper' we will keep both houses, negative equity is really only a problem if you're planning on selling and either way we will be keeping our current house for the long term anyway
These are only ideas we are floating around, nothing is set in stone as it will be about 6 months before we get the money so are exploring as many options as we can.
I do appreciate everything people are saying as it is giving us much to think aobut.

Ms2011

Idbatterim wrote: »

Im guessing the time taken to do up new house would be anywhere from 3-9 months. Its a gamble either way. But not the same as saying you will sell current house in 2-3 years, when nobody knows exactly how bad things will be... In the current climate, I think it really is a gamble though, why not just pay off mortgage, be debt free. and have a few k left over. That 250k or whatever it is, will really be possibly double that by the time you pay it back. I dont know what kind of mortgage you have currently, but the ECB are expected to raise their rates 3 times this year, that not to mention what the banks may raise theirs by... Could you really put a value on being debt free, not being a slave to the bank, the constant worry? In the current climate, god knows how long it could take to sell your house, unless you put it up for a knockdown rate, in which case the negative equity will be even more than you have calculated...

Our mortgage is fixed until next January so paying off the mortgage early would incur a penalty as far a I know? If I were to sell and pay off the balance I couldn't do that until after January anyway.

The_Conductor

Ms2011-

You seem to have your mind made up, regardless of what anyone else says.......

What I would suggest to you- is sit down and treat it in the cold light of day like a business decision........

What is your outlay (100k)
What is the maximum income associated with the property
What is the worse case scenario (income wise) associated with the property
What will be your ongoing costs associated with the property
What will your net income associated with the property be
Given that you're proposing to fund this outright- the biggest tax deductable cost that most landlords leverage (mortgage interest) will not be available to you- and you're both working- so you're looking at paying pretty much a straight 40% of gross income as tax on the rental income.......

After you sit down and look at the probable rental income- the probable costs- and the tax due- what would your return on investment be?

Personally- regardless of what I think is going to happen to the property market once the crash really starts- if you can get a reasonable ROI on an investment- and its in a high interest area- I'd ignore my gut feelings, and sit down and do the sums......

A reasonable ROI is probably around 7-8% (anything higher and you're positively laughing), anything under 6% is simply not worth the effort and the risk involved.

Ms2011

smccarrick wrote: »

Ms2011-

You seem to have your mind made up, regardless of what anyone else says.......
.

Unfortunately my mind is far from made, couldn't be more unsure what to do for the best. Writing down possbile scenarios is helping me think them through and hopefully give people the oppurtunity to see the holes in them that I'm not, prehaps you are mistaking this for me making up my mind whereas I am taking on board everything that is being said.

smccarrick wrote: »

What I would suggest to you- is sit down and treat it in the cold light of day like a business decision........

What is your outlay (100k)
What is the maximum income associated with the property
What is the worse case scenario (income wise) associated with the property
What will be your ongoing costs associated with the property
What will your net income associated with the property be
Given that you're proposing to fund this outright- the biggest tax deductable cost that most landlords leverage (mortgage interest) will not be available to you- and you're both working- so you're looking at paying pretty much a straight 40% of gross income as tax on the rental income.......

After you sit down and look at the probable rental income- the probable costs- and the tax due- what would your return on investment be?

Personally- regardless of what I think is going to happen to the property market once the crash really starts- if you can get a reasonable ROI on an investment- and its in a high interest area- I'd ignore my gut feelings, and sit down and do the sums......

A reasonable ROI is probably around 7-8% (anything higher and you're positively laughing), anything under 6% is simply not worth the effort and the risk involved.

V.interesting way of looking at things, gonna get my calculator out and crunch some numbers based on this thanks!

The_Conductor

Be ruthless with your calculations-

Occupancy will depend on the area the property is in (have a look on Daft to gauge the current level of available property in this category in the area). If there is a fair bit of available property at present in this price category- you are looking at undercutting the market to let the place, and will have to factor in significant vacant periods between lettings.

Costs- don't assume that your OH will have the time/energy/enthusiasm to spend months on end making the place habitable. What might appear to be an interesting do'er-up'per as you put it- could turn into a monstrosity- when building regulations and rules governing rental accommodation standards are explored properly. Do not assume that you're in a position to do a significant amount of the work yourself- and do not assume you can let substandard property for a lower amount- it doesn't work like this anymore.......

You have to compare different investment options- and whether you like it or not- repaying a lump of your current mortgage is also an investment option that you need to consider. Its a secure decision- it doesn't involve unknowns, and when you factor in interest rate increases on the horizon- is a rock soldid 5.5-6% ROI, without any of the risks involved in a rental property.

Letting a property is similar to letting 20 properties- the paperwork is the same, the same declarations have to be made, your taxes are calculated in a similar manner. You will not get by on back of the envelope calculations or reckonings- everything needs to be above board, the property needs a BER, the tenancies have to be registered, and your obligations do not end when you have a tenant- you have to maintain and upkeep the property- and are legally obliged to do so (down to mowing the lawn, if it has one).

Do not enter this lightly- you need to study this carefully.

Ms2011

Thanks v.much for all the advice, I'm terrified I'm not going to use this money to it's fullest potential and I probably won't get a second chance with this kind of cash ever again so I'm going to do alot of hard thinking before I do anything

Idbatterim

Miss 2011, by paying off the mortgage early, that woud already be a huge saving / investment... alternatively you could sell your place, you would be about even then. Then go back and borrow for the doer upper plus whatever you need to do the place up. (if this is even possible). I think that even if you moved quick that selling will take quite a while and prices are still dropping... I would be so careful if I were you.

Senna

There are many things that could happen, but from reading your replies i'm just choosing 2.

1. You buy the other house with cash. you might have a few thousand left, i think 30k is optimistic (10k realistic after fees etc) . You do the house up and it's ready to live in by next year. So by 2012, you have 1 house in huge NE, you're coming out of a fixed rate and probably moving onto a large SVR (correct me if its tracker). You could rent one house out, the chances of it paying even half the mortgage is remote. You will have two properties both dropping in value but your mortgage getting higher and higher (interest rates).
IMHO; asset values = 170k, Mortgage 250k.
EG; 250k @8% over 25yr = €1920 Lets say rent pays half which is very very generous. Your outgoing = €960 per month.


2. You pay off the NE, get the house sold and rent. You watch the market and see rural houses dropping in value (fairly certain prediction). Your 100k fix-it-upper, realistic price in 2012 for ready to move into, 80k.
Asset value = 80k, Mortgage = 70k. Even in high interest rates, a tiny mortgage will always be best as interest rates will vary and at the time of purchase you wont be at the mercy of the banks. If its too high, wait it out.

EG; 70k @8% over 25yr = €540 per month.


I'm being very generous with example 1 and maybe pessimistic with example 2, but which looks better?

Ms2011

If I were to put my current house on the market, is there anyone buying out there now?? This is my concern with that plan.
Would my house be on the market long, I know there are alot of variables here but is it possible my house could sit waiting to be sold all the while losing value making my 100K less and less likely to get me out of NE.
Either way I can't really sell until January until I come out of my fixed mortgage rate without incurring a penalty, right?
Guess it's kind of a case of waiting things out and watching the market over the next few month but I definately feel a little more clued in now after talking to people here.

Zamboni

Ms2011 wrote: »

I definately feel a little more clued in now after talking to people here.

Please don't allow that to be the extent of your research.

Mr. Loverman

Ms2011 wrote: »

is there anyone buying out there now??

Yes, but only if the property is priced correctly, e.g. about 33% of the peak price.

Senna

Ms2011 wrote: »

I know there are alot of variables here but is it possible my house could sit waiting to be sold all the while losing value making my 100K less and less likely to get me out of NE.

Price it correctly and it will sell, there are always buyers out there, no mater what anyone else says. Most of the people saying houses wont sell now, have their houses priced too high. Seen you bought in 2009 at 262k, your figure of 170k probably is very realistic , unless 262k was a terrible deal 2 years ago.

Ms2011 wrote: »

Either way I can't really sell until January until I come out of my fixed mortgage rate without incurring a penalty, right?

Just because its a penalty doesn't mean you wont benefit from paying it. Have you enquired from your bank how much the fee is? or do you know what calculation method they use?
Say your house drops 2/5/10% in value in the time you wait for the fixed rate to end, @5% thats €12.5k. Is the breakage fee less? With TRS stopping and ECB rates rising, i'd say 2012 will be a terrible year to be trying to sell a house.

Ms2011

Zamboni wrote: »

Please don't allow that to be the extent of your research.

No myself and my OH are making an appointment with my Dad's financial advisor, he's been pretty good for him over the years.

Ms2011

Mr. Loverman wrote: »

Yes, but only if the property is priced correctly, e.g. about 33% of the peak price.

Senna wrote: »

Price it correctly and it will sell, there are always buyers out there, no mater what anyone else says. Most of the people saying houses wont sell now, have their houses priced too high. Seen you bought in 2009 at 262k, your figure of 170k probably is very realistic , unless 262k was a terrible deal 2 years ago.

That's a relief, I wasn't sure there was much hope of selling these days. My house was originally priced at 285k in 2009 but with a deposit I 'only' took out a mortgage of 262k.

Senna wrote: »

Just because its a penalty doesn't mean you wont benefit from paying it. Have you enquired from your bank how much the fee is? or do you know what calculation method they use?
Say your house drops 2/5/10% in value in the time you wait for the fixed rate to end, @5% thats €12.5k. Is the breakage fee less? With TRS stopping and ECB rates rising, i'd say 2012 will be a terrible year to be trying to sell a house.

I'm not sure of the exact penalty, I just remember reading it in the small print, I didn't think I'd have the oppurtunity of selling so soon so I never looked too closely into the penalty but I will now.
I also think it might be benefical to know exactly how much my house is worth now and not just guess, so I think I will get it properly valued, it'll help making decisions alot easier if I have more exact figures, thanks for that!!

Zamboni

Ms2011 wrote: »

No myself and my OH are making an appointment with my Dad's financial advisor, he's been pretty good for him over the years.

Good stuff.
Best of luck.

StillWaters

Are you planning on living in the rural house, have you factored in oil increases. My own opinion, and sadly I don't have a crystal ball, is that property prices have further to fall, particularly those outside the major urban areas.

Cash is king over the next couple of years (presuming you don't have the stomach to invest in commodities). Find a good lump sum savings rate, and stick your money there. You won't make a fortune, but you won't lose it. Being in negative equity, you can't afford to gamble this money, and would be foolish to overexpose yourself to property, imho.

Idbatterim

the good thing about a do it upper is, that if you have someone handy, you could purchase and do up the house, for potentially a good bit cheaper than you could buy the ready to move into equivalent. Any money you saved by this, also would not have to be borrowed, saving you alot more. Interest rates may go up as early as next month! So your only protected if on fixed rate... the absolute headache involved in renting out a property, never mind one that is falling in value and where the rent might not even cover the mortgage... It may make sense to wait and see what the coalition do regarding first time buyers and mortgage interest relief etc... People on these boards have no vested interest in your decision, as it will in no way effect us! you cant say the same for estate agents, banks, financial advisor etc... I have seen far better analysis and comment on these boards over the years, than from the vested interest! Theyd have you believe you cant lose on anything, property, shares etc bla bla bla, they only ever go up dont you know!

Ms2011

Well it seems from talking to people here that plan 'A' should be to sell my current house and pay off the NE with the 100k which I am going to start looking into with my mortgage company now. I'm just waiting on a reply to the email I sent them today about my fixed mortgage, the penalties for early settlement etc. I will then get my house properly valued to see exactly how much NE I have and we'll go from there.

My OH and I have discussed a Plan 'B' should plan 'A' not be viable and that is to get my Dad (who is retired and debt free) to purchase our 'doer upper' for us with (our 100k) cash and keep it in his name but signing it over to us in his will. That way if we are forced to keep our current house and anything goes wrong ie. lose our jobs etc. we still have a home to live in that the bank can't touch as it won't be in mine or my OH name. We can go between houses while we're doing the new house up, our jobs are only 15 minutes away from our current house whereas the 'new' house is an hour away so it would be nice to have a base close to our jobs Mon-Fri. Maybe then in the future rent out our current house and move into the 'new' house full time. Haven't full thought this plan out as it is like our last resort.

At the end of the day I'm not interested in making any profits or anything, I'm not greedy, I'm just interested in living a comfortable life in a nice home and trying to figure out the best way to do that

Ste.phen

Ms2011 wrote: »

My OH and I have discussed a Plan 'B' should plan 'A' not be viable and that is to get my Dad (who is retired and debt free) to purchase our 'doer upper' for us with (our 100k) cash and keep it in his name but signing it over to us in his will. That way if we are forced to keep our current house and anything goes wrong ie. lose our jobs etc. we still have a home to live in that the bank can't touch as it won't be in mine or my OH name.

Did your financial advisor discuss the possibility of gift tax implications in doing this?

Ms2011

Ste.phen wrote: »

Did your financial advisor discuss the possibility of gift tax implications in doing this?

We bought our last house off my Dad so we had to jump through hoops to prove we were paying full price for our current house so I have some experience with gift tax.
There is a tax exemption if you have lived in a house you inherit for more than 3 years and which you must continue to live in for another 6 years before selling it. The only problem would be that we would have to have no other house besides the inherited one so by the time we 'inerited' our new house we would have to have sold our current house.
It's complicated so it would be our last course of action.