Unintentional Landlord - what are options for mortgage on new PPR?

plys

Ok so to preface the question, I need to set out my/our scenario:

As a young single man, I purchased a property in 2007. After a while, OH moved in; a few years later we got married.
That property ceased to meet our needs about 5 years ago, so we have been renting since.
Property is currently in negative equity of about 100k. Its rented out, rent is just about covering mortgage repayments as well as related expenses including income tax. It's on a tracker mortgage.

For the purposes of this discussion, lets just say that the rental property:
1. is not going anywhere for the foreseeable future.
2. has no impact on cashflow, in terms of affordability

I would be hoping to purchase a property for about 450-500k, and due to Central bank rules would require a deposit of 100k for same.
If I fill out one of the online mortgage "pre-approval" forms, I invariably come up with pre-approval for 650-700k. That's obviously based on either first-time buyer, or mover/switcher.

I do not fall into either of those categories, so i'm taking those results with a significant pinch of salt.


What mortgage options are there for individuals with existing properties, which are in negative equity? Is the only option to sell the property, crystallising the loss, and paying for it over another 30+ years?

Looking for tales from anyone with experience in a similar scenario, particularly someone who has found a solution and come out the other side happier about it all.

The_Conductor

plys- I'd suggest contacting an independent financial advisor- who may be in a better position to advise you......

Vis-a-vis the current property- its entirely possible (depending on when you bought the property- and where it is!) that your assessment of 100k of negative equity, may be incorrect. Prices in the Dublin area are at levels of over 80% their boom time maximum levels. First step- get a valuation done on the pre-existing property- you may be in for a little surprise.

How different lenders handle the property- is also open to interpretation. Some may refuse to consider lending to you at all, others may be satisfied to allow you to hold the investment property without crystalising the debt- others still- may offer to lend to you- if you sell the pre-existing property- and offer you a 'negative equity mortgage' to carry to 100k (or whatever it is) of negative equity- onto the new mortgage of the property you now propose to purchase.

Organise a consultation with an independent financial advisor / mortgage broker- even if it costs you a couple of hundred quid, it'll be money well spent.

Oral Surgeon

plys wrote: »

Ok so to preface the question, I need to set out my/our scenario:

As a young single man, I purchased a property in 2007. After a while, OH moved in; a few years later we got married.
That property ceased to meet our needs about 5 years ago, so we have been renting since.
Property is currently in negative equity of about 100k. Its rented out, rent is just about covering mortgage repayments as well as related expenses including income tax. It's on a tracker mortgage.

For the purposes of this discussion, lets just say that the rental property:
1. is not going anywhere for the foreseeable future.
2. has no impact on cashflow, in terms of affordability

I would be hoping to purchase a property for about 450-500k, and due to Central bank rules would require a deposit of 100k for same.
If I fill out one of the online mortgage "pre-approval" forms, I invariably come up with pre-approval for 650-700k. That's obviously based on either first-time buyer, or mover/switcher.

I do not fall into either of those categories, so i'm taking those results with a significant pinch of salt.


What mortgage options are there for individuals with existing properties, which are in negative equity? Is the only option to sell the property, crystallising the loss, and paying for it over another 30+ years?

Looking for tales from anyone with experience in a similar scenario, particularly someone who has found a solution and come out the other side happier about it all.

If your income is good and you can show that you will be able to pay both even with stress testing the new and current mortgages, then you don't need to sell. You only crystallise the loss now and pay for it now.... Better to allow that negative equity to sit on your books and reverse itself over time....
My own experience is that you need to tell the bank your financial situation as you know it better than anyone else and tell them that you will be keeping the rental property. If you go in and selling it is on the table then that is what they will push for.....

mitresize5

dont speak to your own bank unless you have to,

they might do business with you but say bye bye to that tracker mortgage if they find out its not your PPR.

Worst case scenario they refuse to do business on the new mortgage and your interest rate jumps 5%

All in all

We were in a very similar situation to yourself, and had no issue getting mortgage approval on a new property.

It all comes down to affordability with the banks - and the stress tests they will do your rental property and proposed new PPR. I did a phone call with aib which took about 30 minutes and they were able to give a good idea for us that the proposal would be acceptable when we went to formal application.

plys

The_Conductor wrote: »

plys- I'd suggest contacting an independent financial advisor- who may be in a better position to advise you......

Thanks, yeah I should clarify - I'm not looking for "advice", just really looking for the experience of others who may have been in a similar situation, but have come out the other side.

plys

All in all wrote: »

We were in a very similar situation to yourself, and had no issue getting mortgage approval on a new property.

It all comes down to affordability with the banks - and the stress tests they will do your rental property and proposed new PPR. I did a phone call with aib which took about 30 minutes and they were able to give a good idea for us that the proposal would be acceptable when we went to formal application.

So I take it you were completely up front about the negative equity? Did they require independent verification of this, ie a valuer, and if so did you have to fund this yourself? Or did they just take your word on it?!

I mean, the idea of getting a valuer in is a good one in the sense that I'd get a better idea of where I'm at...

uberwolf

UB assume a given cash inflow based on the property type and location. Outflows are based on your actuals. Difference reduces your monthly disposable income for affordability assessment. No conversation about selling it or the like.

All in all

plys wrote: »

So I take it you were completely up front about the negative equity? Did they require independent verification of this, ie a valuer, and if so did you have to fund this yourself? Or did they just take your word on it?!

I mean, the idea of getting a valuer in is a good one in the sense that I'd get a better idea of where I'm at...

Hi, no need for a valuer in our case, we were upfront about our negative equity and reasons for not wanting to sell and put the case forward that there is a cashflow neutral situation in relation to the rented out property.

What they did look at was our total borrowings v. salaries, our ability to repay based on net income and savings history (in our case we had been saving more than enough to cover our potential mortgage). There wasn't a requirement to have any more than a 20% deposit in our case (central bank guidelines).

SarahMollie

Hi - sorry to high jack the thread but its a subject I'm a bit interested in myself.

I have a property in my own name, no negative equity. Myself and my OH would like to buy a "forever" home together in a few years, but I don't know if I should try to hang on to my current place as a rental or if I'll be able to seek another mortgage with him on the basis that my place can easily pay for itself if rented.

I calculate that the cost of servicing my mortgage + property tax plus +mgmt fees is about €12k per year. A conservative estimate would put the rent at €22k. Obviously I'll need to pay tax on the rental income but with the rent far exceeding my costs, would a bank be willing to look at giving me 3.5x my salary, even though I've already got 1 mortgage?

Essentially, in budgeting for out forever home, we're basing it on 3.5x our combined salaries + savings etc. Given that my place would sustain itself, can I look to keep it without this being effected?

Oral Surgeon

I'm guessing that your managment fees and property tax would be about €1500, and maybe allow €500 for other expenses... So your mortgage is about €10,000, maybe €5,000 of this is interest??
You will need to allow for a decent amount of tax on that rental income;
€22000
less €2000 managment, property tax and misc expenses
less 75% of mortgage interest (€3750)
So taxable rental income of €16,250 @ 50% or so depending on your other income.... Tax to be paid €8,125.
If you are self employed and self assessed, you will need to pay an additional €8125 as preliminary tax for the following year....

It never looks as good when you do the figures.... So your income needs to be strong to overcome all of this.... They never see it as cost neutral as they need to allow for it being vacant for a few months or interest rate hikes etc....

SarahMollie wrote: »

Hi - sorry to high jack the thread but its a subject I'm a bit interested in myself.

I have a property in my own name, no negative equity. Myself and my OH would like to buy a "forever" home together in a few years, but I don't know if I should try to hang on to my current place as a rental or if I'll be able to seek another mortgage with him on the basis that my place can easily pay for itself if rented.

I calculate that the cost of servicing my mortgage + property tax plus +mgmt fees is about €12k per year. A conservative estimate would put the rent at €22k. Obviously I'll need to pay tax on the rental income but with the rent far exceeding my costs, would a bank be willing to look at giving me 3.5x my salary, even though I've already got 1 mortgage?

Essentially, in budgeting for out forever home, we're basing it on 3.5x our combined salaries + savings etc. Given that my place would sustain itself, can I look to keep it without this being effected?

SarahMollie

Oral Surgeon wrote: »

I'm guessing that your managment fees and property tax would be about €1500, and maybe allow €500 for other expenses... So your mortgage is about €10,000, maybe €5,000 of this is interest??
You will need to allow for a decent amount of tax on that rental income;
€22000
less €2000 managment, property tax and misc expenses
less 75% of mortgage interest (€3750)
So taxable rental income of €16,250 @ 50% or so depending on your other income.... Tax to be paid €8,125.
If you are self employed and self assessed, you will need to pay an additional €8125 as preliminary tax for the following year....

It never looks as good when you do the figures.... So your income needs to be strong to overcome all of this.... They never see it as cost neutral as they need to allow for it being vacant for a few months or interest rate hikes etc....

Yeah I know it wouldnt be much of a money spinner, certainly not the way taxes are these days, it would be more about keeping it as an asset. The mortgage isnt huge as you can probably work out so knocking money off that is actually better value than savings these days, so maybe we could clear the mortgage much sooner than the actual term.

I'd consider myself to be in a pretty good position, but by those calculations I'd be lucky to make €2k per year net. Goes to show that being a LL isnt all its cracked up to be.

Maybe I should just plan on selling it and taking whatever equity gains I've made by paying off the mortgage for a few years with me!

Grumpypants

I was in a very similar situation buying our forever home last year. Although not in negative equity, the bank only really cared about my ability to pay them their mortgage payment on the new house.

The rent covered the mortgage on the first house so they pretty much ignored it completely. It didnt make it better or worse.

A car loan or credit card will have a bigger impact on your borrowing ability.

The only difference was the missus wasnt considered a first time buyer (even though she was). They looked at us as a couple buying a second home so the new rules applied.

The biggest kicker is you need to budget for paying around 60-70%% of the rent on tax and upkeep. Most unintentional landlords soon find out you just make a loss once the taxman calls.

SarahMollie

Grumpypants wrote: »

I was in a very similar situation buying our forever home last year. Although not in negative equity, the bank only really cared about my ability to pay them their mortgage payment on the new house.

The rent covered the mortgage on the first house so they pretty much ignored it completely. It didnt make it better or worse.

A car loan or credit card will have a bigger impact on your borrowing ability.

The only difference was the missus wasnt considered a first time buyer (even though she was). They looked at us as a couple buying a second home so the new rules applied.

Thanks, thats really helpful. My OH knows he won't be considered a FTB but I still have some savings (less now that I've spent a lot of it on property!) and he has really good savings since he's been very diligent over the years, so we should be able to manage the 20% on the type of property we'd want.

Obviously if I just sold and took my equity back out of my current property, then the deposit would be no issue, and potentially we'd have a bigger budget.

Oral Surgeon

mitresize5 wrote: »

dont speak to your own bank unless you have to,

they might do business with you but say bye bye to that tracker mortgage if they find out its not your PPR.

Worst case scenario they refuse to do business on the new mortgage and your interest rate jumps 5%

That may apply if your tracker was linked to it being a PPR and not an investment rental property.
I found that a different bank will lend more readily as your current bank does not want the risk of 2 or 3 properties on one person or couple but a new bank will (as they'll have 20% deposit and have positive equity etc etc)

Michael D Not Higgins

SarahMollie wrote: »

I'd consider myself to be in a pretty good position, but by those calculations I'd be lucky to make €2k per year net. Goes to show that being a LL isnt all its cracked up to be.

You're also building 5k in equity. That's not to be discounted when evaluating these things.

SarahMollie

Michael D Not Higgins wrote: »

You're also building 5k in equity. That's not to be discounted when evaluating these things.

Yeah thats true I suppose. Hard to understand how people make any real income from it though, as equity is nice but its not going to feed you in the short term.

Right now I'm overpaying by 10% to try to chip away at the principle sum as I'm in a fixed period. My general plan is that once my fixed period is over in another 18months or so, to try to throw a small lump sum at it, as my savings are doing nothing for me sitting in the bank right now, they may as well be used to reduce the interest I'll be paying.

Then I can decide whats best to do closer to the time. Would be nice if the LL route was a little more attractive!

CIARAN_BOYLE

SarahMollie wrote: »

Yeah thats true I suppose. Hard to understand how people make any real income from it though, as equity is nice but its not going to feed you in the short term.

Right now I'm overpaying by 10% to try to chip away at the principle sum as I'm in a fixed period. My general plan is that once my fixed period is over in another 18months or so, to try to throw a small lump sum at it, as my savings are doing nothing for me sitting in the bank right now, they may as well be used to reduce the interest I'll be paying.

Then I can decide whats best to do closer to the time. Would be nice if the LL route was a little more attractive!

A lower mortgage on your ppr and a higher mortgage on your rental income is a better idea than a higher mortgage on ppr and a lower mortgage on your rental property.

SarahMollie

CIARAN_BOYLE wrote: »

A lower mortgage on your ppr and a higher mortgage on your rental income is a better idea than a higher mortgage on ppr and a lower mortgage on your rental property.

Yeah, I know thats true from a tax relief POV, but in my circumstances, I work in a job where I have both a fixed and variable portions of my salary. I train myself to live on my fixed income and try to do something useful with my variable as it come in less predictably, but sometimes in a bit of a lump sum.

At the moment the sensible thing to so seems to be to pay down the mortgage as that is my PPR as things stand. Perhaps I should look for some other sort of investment though.

I wonder if I'd be allowed to restructure my borrowings when the time comes to buy a forever home so that I could put more of the debt on my current place when it becomes a rental, and then minimise my borrowings on the new house.

Michael D Not Higgins

SarahMollie wrote: »

Yeah thats true I suppose. Hard to understand how people make any real income from it though, as equity is nice but its not going to feed you in the short term.

There is no real income in it soon after the place is bought on mortgage since so much of the after tax income goes to repaying the loan. Later in the life of the property, say 10-15 years when inflation has brought rents up and your mortgage down you could see proper profit. With taxes staying the same and interest coming down (say 2k of the 10k mortgage) and rent going up (say 28k per annum), you're getting nearly 4k into your pocket and 8k in equity. Let's say you pay off the mortgage that year, then you get 13k into your pocket after tax and now have an asset paid off.

SarahMollie

Michael D Not Higgins wrote: »

There is no real income in it soon after the place is bought on mortgage since so much of the after tax income goes to repaying the loan. Later in the life of the property, say 10-15 years when inflation has brought rents up and your mortgage down you could see proper profit. With taxes staying the same and interest coming down (say 2k of the 10k mortgage) and rent going up (say 28k per annum), you're getting nearly 4k into your pocket and 8k in equity. Let's say you pay off the mortgage that year, then you get 13k into your pocket after tax and now have an asset paid off.

You're selling me the dream MDNH!

Jen44

you are considered a mover. i did this, bought a house on my own then husband moved in and after we had our first child the house no longer suited us. We got a second mortgage with a different bank. Rented out the first house which was in a small bit of negative equity. We got exempt from the 20% deposit rule as the first house was in Drogheda which has a huge demand for rental properties and the new house came in at slightly under the 3.5 times our combined salary. The first house is a tracker mortgage so rent covers the mortgage and about 200 spare which we save each month towards the tax bill!

Jen44

Sarah as someone who has had to keep the first property I wouldn't recommend it! Its always a worry, there's always phone calls about something or other and we have a good tenant ! We are out of negative equity now and are planning to sell the house as soon as its will make us enough to put a few bob into the new house! Im really looking forward to being done with this landlord business!

SarahMollie

Thanks Jen - thankfully this isnt something we've to decide upon straight away because I'm really back and forth on the whole thing.

It does seem like a lot of LL's are getting out these days, so if the private rental sector continues to shrink then maybe the tax treatment of LL's will be reviewed. It seems tough that individuals are taxed at their marginal rate on all their rental income (minus deductions) where by companies can just pay corporation tax on their profits.

The_Conductor

SarahMollie wrote: »

It seems tough that individuals are taxed at their marginal rate on all their rental income (minus deductions) where by companies can just pay corporation tax on their profits.

Plenty of the REITs etc- only have to pay corporation tax on their rental of residential property in this country- the days of the landlord with a couple of properties are long gone.

The biggest inequity in all of this- is the perverse incentive to load as much debt as possible on rental properties- in order to shelter the rental income. People have an inverse incentive to never repay their mortgage- sure why would you- when you loose your biggest shield against tax..........

Anyhow- I diverge.

The very best of good luck- regardless of what you decide to ultimately do.

Dr_Kolossus

Was in similar situation to you op. Own a house in about 100k neg equity. Mortgage on that house was 300k. We could rent it for 1350 per month. We saved about 110k. Bank took my income, my partners income and rental income into account. Worked out we could get a mortgage for about 650k.

So they took the existing 300k on the neg equity from the total. And offered us 350k mortgage.

We went to a few banks, the amounts offered differed slightly, but all worked out the loan based on this same principle