So what happens when you're in negative equity?

uberwolf

Might sound like a stupid question. But what does happen. Do those unfortunate enough to find themselves in negative equity simply have to sit it out until normal service over the course of 10, 15, or 30 years inflates properties back to what they paid for it?

I mean it's happened in so many countries now, is it such a small proportion of the overall market, that life just passes them by? Or...?

JuliusCaesar

uberwolf wrote: »

Do those unfortunate enough to find themselves in negative equity simply have to sit it out until normal service over the course of 10, 15, or 30 years inflates properties back to what they paid for it?......... that life just passes them by? Or...?

Negative equity is only an issue when you want to sell your house.

If you buy a place you can live in for the next 10, 20, 30 years - why would you worry? Of course you can give yourself a headache thinking about it, but if you like the house and the location, and the house suits you, you are ok.

Do you spend much time thinking about depreciation of your car (something that'll never go into positive equity) ?

The_Conductor

As JuliusCaesar says- negative equity is simply a measure of paper wealth- its totally meaningless until such time as the asset might be disposed of.

It is quite simply a matter of sitting quietly, paying your mortgage and whatever other obligations you may have, until such time as your debts are cleared- at which time you do as you choose.

Disposing of an asset after a period for less than the nominal value it was originally purchased for, irrespective of capital repayments, while it does infer a negative equity situation- is not necessarily a bad thing- you've had the use of the asset for the intervening period of time after all......

Funny that JuliusCaesar should mention the depreciation of cars- its a pity other asset types don't acquire 'classic' status in the manner cars do Favourable tax status too!

johnnyskeleton

A mortgage is just a loan, if you borrow €500k you have to repay €500k plus interest. The property acts as security for the loan, but that doesn't mean that if it is worth less than the loan, that the rest of the loan doesn't have to be paid back.

In practical terms if someone wants to sell their house but they are in negative equity, they should contact their bank and the bank will more often than not try to come to some arrangement with them, whether it is that they stump up the rest of the cash, pay off the remainder as a personal loan or in some cases just hand back the keys and the bank will write it off. But the worst thing someone in negative equity could do is to abandon the property and hope the loan just goes away by itself.

uberwolf

My question is specific to non stressed situations - mortgage isn't a strain

gurramok

In the UK, you could hand back the keys, you cannot here until you have paid off the loan in full through a sale/paying off the shortfall.

As well as being stuck where you are until the price rises to meet your mortgage amount, you have to ask, is it worth your while paying for an asset that is worth less on the market even if it takes 10 years?

esharknz

It's not a concern really if you don't have to sell and are able to pay your mortgage. If you are happy where you are, then I wouldn't even worry about it at all, the mortgage will be reducing all the time.

I've heard that if you have to sell and cannot meet the cost of the sale price, then you'll just get a personal loan. I've even heard it being possible to move to another place if in negative equity (but you have to have the deposit), through taking out a loan to cover the negative equity (sounds more like a close to 100% mortgage). Not sure if this is correct or not.

spockety

If you're in negative equity you can go nowhere, you cannot sell your property unless you can find sufficient funds elsewhere to cover the shortfall in value.

Technically on a lot of mortgages the banks can come knocking to force you to address your LTV ratio if it goes above what your mortgage covers. e.g. "Your mortgage is 92% LTV, but you owe use 120% of what the property is worth, please forward funds to us to bring the value of your mortgage back down to 92% or below".. :eek:
Can't picture it happening here though.

grizzly

What about a couple who have split up who had bought a home together. Where sitting tight isn't an option? Would getting personal loans be the only answer?

AARRRGH

grizzly wrote: »

What about a couple who have split up who had bought a home together. Where sitting tight isn't an option? Would getting personal loans be the only answer?

Either personal loans or a gift from their parents.

Either way the difference must be repaid.

ntlbell

grizzly wrote: »

What about a couple who have split up who had bought a home together. Where sitting tight isn't an option? Would getting personal loans be the only answer?

they could rent it out?

The_Conductor

ntlbell wrote: »

they could rent it out?

Not really an option at the moment- supply of rental property has reached the extent that in many cases landlords are pulling properties from the market. Daft alone has almost 23,000 rental properties listed- and the length of time sale properties are on the market is continuing to lengthen the whole time.......

ntlbell

smccarrick wrote: »

Not really an option at the moment- supply of rental property has reached the extent that in many cases landlords are pulling properties from the market. Daft alone has almost 23,000 rental properties listed- and the length of time sale properties are on the market is continuing to lengthen the whole time.......

I'm sure of it's priced right it could be still rented.

To be honest about it, I would prefer to take a bit of a hit per month and with the ex make up the difference than have to live in the house with her.

sometimes quality of life is worth a few quid

shoegirl

If:
a) you keep up to date on your mortgage
b) are not looking to remortgage or change lenders/rate
c) are not looking to sell
then nothing.

You are only hit by negative equity if you need to sell or remortgage.

shoegirl

spockety wrote: »

If you're in negative equity you can go nowhere, you cannot sell your property unless you can find sufficient funds elsewhere to cover the shortfall in value.

Technically on a lot of mortgages the banks can come knocking to force you to address your LTV ratio if it goes above what your mortgage covers. e.g. "Your mortgage is 92% LTV, but you owe use 120% of what the property is worth, please forward funds to us to bring the value of your mortgage back down to 92% or below".. :eek:
Can't picture it happening here though.

They cannot do that if they agreed to the original valuation and were willing to advance you the loan on those terms. There is no condition in Irish mortgages typically "requiring" them to maintain a particular LTV. The rate is given on the valuation assessed when the loan is granted. That is the risk the bank were as well aware of as the lender was. In any case, again, as long as there are no arrears or need to sell, there is no issue. The value is based on what you owe them, depreciation of your "security" on that loan cannot be held against you in this way.

johnnyskeleton

gurramok wrote: »

In the UK, you could hand back the keys, you cannot here until you have paid off the loan in full through a sale/paying off the shortfall.

In genuine, "I've lost everything" scenarios, some of the banks will take back the keys, sell the properties and write off the remainder of the debt. The problem is that so few people are prepared to go into the bank and discuss their circumstances with their bank manager.

uberwolf

my query really related to the likes of myself, comfortable with the mortgage, but ultimately would like to move onwards and upwards. Repenting at leisure.

Not seeking the doomsday scenario (but secretly delighting in the fact I hold my mortgage with my employers - I can't see a court in the land judging against me should I face redundancy)

As things stand I'm deep into 6 figures in negative equity, can tip away at the mortgage, could afford to press harder, but am wondering will my reward for pushing harder be in this life or the next! Is a nest egg and sizable deposit more useful to me than reducing the debt if I want to move on.

In a general sense, there is going to be a plethora of home owners like myself who f*cked up.

My ray of hope is an anecdote. My Grandfather bought his home for 1.5 times his annual salary in the mid/late 50's. That was a chunky mortgage for the time. Within a year properties on the same street were changing hands for 40% less than he'd paid. 5 years later twas back on an even keel. These things are cycles, the bears and bulls are wrong on both ends.

The_Conductor

uberwolf wrote: »

My ray of hope is an anecdote. My Grandfather bought his home for 1.5 times his annual salary in the mid/late 50's. That was a chunky mortgage for the time. Within a year properties on the same street were changing hands for 40% less than he'd paid. 5 years later twas back on an even keel. These things are cycles, the bears and bulls are wrong on both ends.

Both ends of the cycle are always going to be overstated (in any chain which can represented with standard statistical curves). The problem with applying a standard statistical cycle to the housing market is historically a cycle is between 14 and 20 years- not 4-5 years.

The anecdote about your grandfather, while comforting, is not exactly relevant unfortunately. Historical prices for housing units are between 3 and 5 times annual salary (note: this does not factor cardboard box apartments into the equation). Further- historically- we have never had interest rates akin to the way we have them now (I know my parents were paying 18% on their first mortgage in the 60s for example (and my father was a banking employee with a sizeable discount on the open market rate at the time).

Its unfortunate- but the only real economic example that we can hold up to today's market as an example- is the great economic depression and its aftermath from 1929 onwards. We are not experiencing a temporary Irish economic blip- we are up the creek without a paddle- but the rest of the world is in the doldrums too- there is no glimmer of light in New York, or London or Boston or where-ever- which people can hold up as an aspiration if things don't get better at home. The major economies of the world are all sinking. Developing economies such as China are in even worse trouble- they are at the stage where they are refusing to sell train tickets to people from certain regions so they can't congregate in the cities and cause social unrest. Its coming though- and a lot closer to home than China.....

Unless Irish personal bankruptcy laws are remodelled on Irish Commercial bankruptcy laws, and the commercial provisions extended to private individuals- you are better off chipping away at your mortgage principle, instead of trying to save a seperate deposit elsewhere (as it can currently be garnished anyhow- so its defacto not yours regardless of the status of it).

We are in a deflationary situation. Its a given that house prices are falling- but so too is everything else (and it is beginning to feed down to the consumer level at long last). Your money is worth more tomorrow than it is worth today. Why wouldn't repay your debts with cheaper money today- than more expensive money tomorrow (its a bit of a diabolic twist on the economic paradox of thrift- but you see where I am coming from I hope).

S.

dny123456

smccarrick wrote: »

We are in a deflationary situation. Its a given that house prices are falling- but so too is everything else (and it is beginning to feed down to the consumer level at long last). Your money is worth more tomorrow than it is worth today. Why wouldn't repay your debts with cheaper money today- than more expensive money tomorrow (its a bit of a diabolic twist on the economic paradox of thrift- but you see where I am coming from I hope).

S.

I disagree.

With interest rates being so low at the moment, you are better off to keep the mortgage and save your nest egg separately. Interest rates are highly unlikely to increase in the medium term with the state of international finances.

Its is pretty easy to get higher returns on your deposit than you pay interest on your loan (well depending on your mortgage rate/type, e.g. +0.75 tracker will be different situation from 5year fixed!). In addition, it makes no sense to pay off the mortgage and further expose yourself to the risk of the deflating asset and possible repossession. You will have more flexibility if you have a separate nest egg for the rainy day. Not that you would contemplate walking away from the mortgage if it all went pear shaped, but you would have more control over your own destiny.

esharknz

uberwolf wrote: »

my query really related to the likes of myself, comfortable with the mortgage, but ultimately would like to move onwards and upwards. Repenting at leisure.

Not seeking the doomsday scenario (but secretly delighting in the fact I hold my mortgage with my employers - I can't see a court in the land judging against me should I face redundancy)

As things stand I'm deep into 6 figures in negative equity, can tip away at the mortgage, could afford to press harder, but am wondering will my reward for pushing harder be in this life or the next! Is a nest egg and sizable deposit more useful to me than reducing the debt if I want to move on.
.

Yeah, we're in a similar situation (my OH bought the house on his own before I came into his life, so it was all based on his income) and wondering whether we should just save the extra (we've the two incomes coming in, paying a mortgage that was based on one income, so I feel very fortunate) or maybe decrease the term of the mortgage (15 years to go at present). I think we are in negative equity, but not to a six figure tune.
Ultimately we'd like to have some chance of being able to move country, but at this stage, I get the feeling that if we sold up now, we'd be walking away with nothing.

The_Conductor

dny123456 wrote: »

I disagree.

With interest rates being so low at the moment, you are better off to keep the mortgage and save your nest egg separately. Interest rates are highly unlikely to increase in the medium term with the state of international finances.

In my opinion- with interest rates so low at the moment, you are better off trying to knock small lumps out of the principle, while you're still employed and in a position to pay it.....

I do agree with you that interest rates are unlikely to increase in the short to medium term- the global economy is up the creek, and even with the likes of the US bailout plan, unlikely to recover for forseeable.

dny123456 wrote: »

Its is pretty easy to get higher returns on your deposit than you pay interest on your loan (well depending on your mortgage rate/type, e.g. +0.75 tracker will be different situation from 5year fixed!).

Depends- the interest rates on offer, with the possible exception even now of Anglo Irish, are actually surprisingly poor. If you want any sort of medium term return you need to be invested in sovereign debt, not have your money on deposit.....

dny123456 wrote: »

In addition, it makes no sense to pay off the mortgage and further expose yourself to the risk of the deflating asset and possible repossession.

While the mortgage may be secured on the property- the debt is associated with the individual, not the property. Your exposure to the deflating asset and possible repossession is identical- irrespective of how you structure your assets.

dny123456 wrote: »

You will have more flexibility if you have a separate nest egg for the rainy day. Not that you would contemplate walking away from the mortgage if it all went pear shaped, but you would have more control over your own destiny.

If the worst were to happen- the mortgage lending institution are legally entitled to purloin any liquid assets you may have to satisfy any difference in your debt to them. Irish law sucks in this respect- and is in serious need of dragging into the 21st century. The whole of the risk is associated with the individual, not the lender (though obviously it reaches the point where its simply not a lenders while to chase irrecoverable debts).

,mnb

uberwolf wrote: »

my query really related to the likes of myself, comfortable with the mortgage, but ultimately would like to move onwards and upwards. Repenting at leisure.

Not seeking the doomsday scenario (but secretly delighting in the fact I hold my mortgage with my employers - I can't see a court in the land judging against me should I face redundancy)

As things stand I'm deep into 6 figures in negative equity, can tip away at the mortgage, could afford to press harder, but am wondering will my reward for pushing harder be in this life or the next! Is a nest egg and sizable deposit more useful to me than reducing the debt if I want to move on.

In a general sense, there is going to be a plethora of home owners like myself who f*cked up.

My ray of hope is an anecdote. My Grandfather bought his home for 1.5 times his annual salary in the mid/late 50's. That was a chunky mortgage for the time. Within a year properties on the same street were changing hands for 40% less than he'd paid. 5 years later twas back on an even keel. These things are cycles, the bears and bulls are wrong on both ends.

fair play to you. i like this post.

gar_29

and also, as you're constantly tapping away at the mortgage, in the medium tern the debt will fall below the value of the property. most people in neg equity will be out of it in ten years, even if the mrket doesn't improve.

Kipperhell

smccarrick wrote: »

In my opinion- with interest rates so low at the moment, you are better off trying to knock small lumps out of the principle, while you're still employed and in a position to pay it.....

That is contrary to logic while it is low you are better using the cheap credit when it is high you are meant to reduce the principle. If you can afford more while credit is cheap you are best trying to save the money or invest it hoping you get more for it than the current low rate of the mortgage.

gurramok

gar_29 wrote: »

and also, as you're constantly tapping away at the mortgage, in the medium tern the debt will fall below the value of the property. most people in neg equity will be out of it in ten years, even if the mrket doesn't improve.

Basically you are sacrificing 10yrs of your life to negative equity, it just stalls your mobility for that period of time.