Negative equity on second house

algerian

Hi. Firstly I don't blame the Government, developers, bankers or anyone else for my current situation. It is because of my own decisions at providing a better future for myself and my family. But I am just asking for advice. Here's my situation.

Me and my husband bought a 3 bed semi in a regional town in 2001. By 2007 we'd accessed about 25k in equity for wedding/refurb etc. We decided to move because we had a baby in 2007 and bought another house for 340k + 15k stamp duty. We couldn't sell our own so rented it out. As we couldn't get the full mortgage for the new house we again released equity for the first home - of 50k. Here's what we owed in 2007:
House 1 - 243k (valued by bank's valuer at 275k at the time)
House 2 - 320k

We love our new home and have had a tenant in second home for last 18 months. However. she moved out with no notice on Xmas Eve. Similar houses are on market for 180k+. Our tenants rent for last 18 months has just paid off interest only mortgage on the first house.

Our second house seems to have retained its value and we'd happily stay here forever anyway.

My question is though what is the best thing to do about first house. Should we start paying interest plus repayment every month even though it's probably devaluing every month? Can we sell the house for 180k and owe the bank the other 63k or add it onto second mortgage?

The_Conductor

You need to discuss matters with your lender sooner rather than later. Interest rates are not expected to rise now, until Q4 2010, or very possibly Q1 2011- depending on how the two big Eurozone economies do. Rents are falling (in line with the cut in rent-allowance announced in the budget and pencilled in for the 2010 budget later this year). If you were barely meeting interest-only payments with rental income to-date- you are going to have to have a serious sit down and re-assess your situation.

I don't mean to be alarmist- but if these were your 2007 positions:

House 1 - 240k
House 2 - 320k

Its highly probable that 2010 figures are akin to:

House 1- 160-170k
House 2- 210-225k

Property is not selling- the only movements are where sellers price significantly below comparable properties on the market. Property falls have slowed- but in November, still averaged 1.28% for the month (annualised @ 19.4% nationally).

It is highly unlikely any lender will allow you add further principal to a residential loan that is already in negative equity. Its possible a personal loan for the difference between the o/s balance and the realisable sale price may be countenanced (depending on whether your personal finances support it- but keep in mind lending criterion have been tightened considerably).

If you intend to stay in the second house indefinitely- ignore whether its in negative equity or not- its irrelevant- but do not expect it to qualify as a source of finance to clear up the mess from House 1- if it hasn't fallen in value since 2007- its unique in the country- because everywhere else certainly has.......

House 1 is a noose around your neck. Are you willing to accept that you're most probably going to have higher costs associated with it in the future (as interest rates rise), and lower rental income (rents have fallen, and continue to do so). If you're willing to take the longer view (aka 20 years+ ) and can afford the cost associated with it- just keep your head down, and things will get better (eventually). If you can't- accept that you're going to loose money on it- hand it over to an estate agent and tell him/her to dispose of it at any cost........

You are far from alone in this situation- and it is galling that all the developers and banks are getting bailed out- while the little people are left to pick up the pieces. Unfortunately- thats the situation.

Agent J

Fair play for making the point about personal responablity. It takes a lot to admit that.

Dont really have much to add to the above post except to repeat and reinforce one point

Interest rates.

This is the next major issue which will hit Ireland(I know, what bloody next?).

I'd be preparing as if rates are going to start rising Q4 2010. This means more expensive payments on existing mortages. The downwards trend in rent means you will not be able to cover this with the existing rent.

If you move now and ditch house one you might be able to get it all tied up before it hits.

Oh one more thing. One way to think about it is you want to protect your home at all costs. Trying to hold on to both may be too much of a strain and end up bankrupting you which in this country you do not want.

And certainly make an appointment for a meeting with your lenders ASAP.

algerian

Thanks for your replies.

"If you can't- accept that you're going to loose money on it- hand it over to an estate agent and tell him/her to dispose of it at any cost........ "

Can we legally sell it for, say 170k, and pay the remaining 73k back over a set period?

Senna

You can only sell it for below the mortgage amount with the lenders approval. Which they can give, but will depend on how they view your personal finances.