Positive equity as deposit?

James Bond Junior

Just thinking something through here so if it is totally ridiculous please don't slaughter me.

A relative bought a few years ago when prices were practically at rock bottom. Fast forward a few years and they are looking to upgrade. Is it possible to use the positive equity in their first house as a "deposit" on a new home or would they need to sell first? Just wondering about options here going forward as they are in two minds about selling yet. The PE would be in the region of about 50k.

The_Pretender

No. The banks wouldn't accept it with a charge over the house, which they wouldn't get due to there already being another mortgage on it. They would lending €50k with no security during a time when house prices are inflated due to lack of supply - that positive equity could well be gone in 5 years time.

This is aside from the usual stuff like needing 6 months + of a track record of saving as well as not lending 100% of the mortgage required.

James Bond Junior

The_Pretender wrote: »

No. The banks wouldn't accept it with a charge over the house, which they wouldn't get due to there already being another mortgage on it. They would lending €50k with no security during a time when house prices are inflated due to lack of supply - that positive equity could well be gone in 5 years time.

This is aside from the usual stuff like needing 6 months + of a track record of saving as well as not lending 100% of the mortgage required.

That's fine, I was thinking as much but it was a discussion we had and they thought there was a way. I'll pass on the message.

The_Pretender

James Bond Junior wrote: »

That's fine, I was thinking as much but it was a discussion we had and they thought there was a way. I'll pass on the message.

If they wanted to re-mortgage the property to free up cash then that's a possibility, however it would be tough to find a bank to accept that money as a deposit. Borrowing to fund a deposit raises a huge red light. Even people who are given the deposit by parents are often required by the banks to have a declaration signed by the parents stating that the money is a gift and is not to be repaid, so that should the mortgagor default and the bank sell the house, the parents can't take action claiming they have a right to any of the proceeds.

Samuel T. Cogley

I thought it was perfectly normal to use the equity in the house being sold as the deposit on the new house. Open to correction.

Cyrus

Samuel T. Cogley wrote: »

I thought it was perfectly normal to use the equity in the house being sold as the deposit on the new house. Open to correction.

you would need a bridging loan and afaik they dont exist at the moment

GingerLily

Samuel T. Cogley wrote: »

I thought it was perfectly normal to use the equity in the house being sold as the deposit on the new house. Open to correction.

You mean the money you make from the sale?

Or the difference between what you owe on your current house and its estimated value?

Cyrus

GingerLily wrote: »

You mean the money you make from the sale?

Or the difference between what you owe on your current house and its estimated value?

being sold isnt sold

Samuel T. Cogley

Cyrus wrote: »

you would need a bridging loan and afaik they dont exist at the moment

I thought that was only when you hadn't sold your house yet.

Oh well you live you learn, Thanks Cyrus.

draiochtanois

This post has been deleted.

Cyrus

Samuel T. Cogley wrote: »

I thought that was only when you hadn't sold your house yet.

Oh well you live you learn, Thanks Cyrus.

i think we are confusing things,

if you have sold your house if course you can use the equity, but i believe the OP is asking can you use the unrealised equity in a house that you intend to sell as equity

L1011

The_Pretender wrote: »

If they wanted to re-mortgage the property to free up cash then that's a possibility, however it would be tough to find a bank to accept that money as a deposit.

99% certain it can't be considered deposit under the Central Bank rules even if a bank wanted to

john.han

It can be used as a deposit to meet the 20% deposit rule for their new property. Bank will insert a clause in their contract that they have to have a contract in place for the sale of the current property for a certain amount, as long as there is sufficient funding so that the new loan is no more than 80% of the value of the new property then I don't see the issue once LTI guidelines and legal fees and all that are taken into account.

The_Pretender

L1011 wrote: »

99% certain it can't be considered deposit under the Central Bank rules even if a bank wanted to

I think you're right there. My mistake, I misread the below line and thought they wanted to keep the house they're living in now and also buy a new one

James Bond Junior wrote: »

Is it possible to use the positive equity in their first house as a "deposit" on a new home or would they need to sell first?

radharc

Not sure where some of the replies ITT are coming from, of course you can use the equity from the original home, how the hell would anybody trade up without it?

Obviously you will need to sell your 1st house before drawing down the 2nd mortgage but you can obtain approval in principle.

KellyXX

Samuel T. Cogley wrote: »

I thought it was perfectly normal to use the equity in the house being sold as the deposit on the new house. Open to correction.

My brother just did that.
Moved out of their house, remortgaged it and used that as deposit on a bigger house.
They are renting their original house now, and may or may not sell it next year, but they aren't required to by the bank. Both mortgages now with AIB I think.

They were in negative equity until not too long ago , but out of it now, if that makes a difference.

Cyrus

radharc wrote: »

Not sure where some of the replies ITT are coming from, of course you can use the equity from the original home, how the hell would anybody trade up without it?

Obviously you will need to sell your 1st house before drawing down the 2nd mortgage but you can obtain approval in principle.

i think thats where the confusion is, obviously you can use the equity but it has to be realised in some way, either through a sale or remortgage, once you have the money where it came from is a to a large extent irrelevant.

James Bond Junior

radharc wrote: »

Not sure where some of the replies ITT are coming from, of course you can use the equity from the original home, how the hell would anybody trade up without it?

Obviously you will need to sell your 1st house before drawing down the 2nd mortgage but you can obtain approval in principle.

This is what I want to know. Would the house need to be sold first or would a clause of subject to sale be OK?

KellyXX

James Bond Junior wrote: »

This is what I want to know. Would the house need to be sold first or would a clause of subject to sale be OK?

Same as any normal purchase. The old house is sold as part of the chain. If you have equity it goes off the agreed loan as the deposit at the time of execution.
You don't need it sitting in the bank beforehand.

Cyrus

James Bond Junior wrote: »

This is what I want to know. Would the house need to be sold first or would a clause of subject to sale be OK?

it will have to be sold before you close on the new house

breeno

Again some confusion here. The two deals can be done simultaneously. I'm in the process of doing it at present. I have my loan offer for my new house and it is subject to previous mortgage being cleared and equity received from sale of my existing house being used as deposit.

Cyrus

breeno wrote: »

Again some confusion here. The two deals can be done simultaneously. I'm in the process of doing it at present. I have my loan offer for my new house and it is subject to previous mortgage being cleared and equity received from sale of my existing house being used as deposit.

Yes of course but you cant close on the new house until the old one is sold,

the equity has to be realised.

cruizer101

KellyXX wrote: »

My brother just did that.
Moved out of their house, remortgaged it and used that as deposit on a bigger house.
They are renting their original house now, and may or may not sell it next year, but they aren't required to by the bank. Both mortgages now with AIB I think.

They were in negative equity until not too long ago , but out of it now, if that makes a difference.

So you are saying they had a house worth x on which until recently they had a mortgage of greater than x. It is now worth more than x so they remortgaged the difference between the house value and the mortgage to use as a deposit, this would still have to lead to a mortgage under 90% of the value of the house. They then took that money and used it as a deposit on another house with a mortgage bigger than their original.

Call me sceptical but I can't see any lender approving that, they have gone from a nearly in negative equity mortgage of x to a total mortgage debt of over twice that, and one of the houses is a no longer a residential mortgage but rather a commercial one.

KellyXX

cruizer101 wrote: »

So you are saying they had a house worth x on which until recently they had a mortgage of greater than x. It is now worth more than x so they remortgaged the difference between the house value and the mortgage to use as a deposit, this would still have to lead to a mortgage under 90% of the value of the house. They then took that money and used it as a deposit on another house with a mortgage bigger than their original.

Call me sceptical but I can't see any lender approving that, they have gone from a nearly in negative equity mortgage of x to a total mortgage debt of over twice that, and one of the houses is a no longer a residential mortgage but rather a commercial one.

I have no idea what you are saying there.
But yes they have gone from one house to two houses without adding further cash if that's what you are saying.

cruizer101

I'll put in some made up numbers to make example bit clearer.

They had a mortgage of 250k on a house that was recently worth less than that. Lets say its now worth 300k, they remortgage but would only be allowed up to 90% (I think this should be 80% as it is now an investment property but lets go with 90) of the value of house so that is mortgage of 270k thus releasing 20k.

They then took the 20k plus some savings say another 40k to buy a house worth 320k with a mortgage of 260k (near enough the 80% for non first time buyers). So they now have 2 mortgages and total debts of over 500k.

I just can't see any lender offering that kind of situation. I know my figures are made up and their exact situation will be different but there must be something else going on for them to have got an offer like that.

KellyXX

cruizer101 wrote: »

I'll put in some made up numbers to make example bit clearer.

They had a mortgage of 250k on a house that was recently worth less than that. Lets say its now worth 300k, they remortgage but would only be allowed up to 90% (I think this should be 80% as it is now an investment property but lets go with 90) of the value of house so that is mortgage of 270k thus releasing 20k.

They then took the 20k plus some savings say another 40k to buy a house worth 320k with a mortgage of 260k (near enough the 80% for non first time buyers). So they now have 2 mortgages and total debts of over 500k.

I just can't see any lender offering that kind of situation. I know my figures are made up and their exact situation will be different but there must be something else going on for them to have got an offer like that.

As I said. I don't know the exact figure, but they have gone from owni g one house to owning two houses without having to add cash into the mix.
All I know is part of the deal was that they had to move the old mortgage from ulsterbank to AIB where the new mortgage was from. Afraid I can't tell you any more than that because I don't know anymore.

James Bond Junior

LTV is currently at about 70% with 25 years left. Would remortgaging to release equity be a solution? Also would it be financial suicide to do so? Hoping to keep the property as a rental. At current market rates the yield would be at approx 10.25%.

KellyXX

James Bond Junior wrote: »

LTV is currently at about 70% with 25 years left. Would remortgaging to release equity be a solution? Also would it be financial suicide to do so? Hoping to keep the property as a rental. At current market rates the yield would be at approx 10.25%.

Ask the banks and they will give you a definitive answer. There will be a lot more variables than you can tell us here I'm sure.

Derek Zoolander

James Bond Junior wrote: »

LTV is currently at about 70% with 25 years left. Would remortgaging to release equity be a solution? Also would it be financial suicide to do so? Hoping to keep the property as a rental. At current market rates the yield would be at approx 10.25%.

from experience the deposit isn't the rate limiting factor its the total combined mortgage amount that the bank need to be comfortable with.

So if the balance on first mortgage is 300k and the mortgage required for the upgrade is 500k then once they can repay the 800k mortgage without relying on the rental income they will be fine

Lumen

This thread is weird.

A deposit is a sum of money that is paid in advance of a purchase, to secure that purchase. The term only makes sense in the context of buying a new build house, and in that case the deposit is required very early in the process and is refundable until much later, e.g. when custom finishes are being applied.

When buying a second-hand house the money is paid to the vendor by your solicitor. For a property bought with a mortgage that money comes from two sources: the bank issuing the mortgage and the buyer. There is no "deposit" here, there's just funds from the buyer and funds from the bank. When the solicitor has all the funds in his client account he can execute the purchase.

If you need to sell a property to raise your portion, the solicitor still can't execute the purchase until he has that money (and the banks money), and that can't happen until the sale is completed.

The only way the bank could facilitate an overlap (i.e. the purchase to be completed before the sale) is by advancing your portion of the funds in addition to the mortgage amount. This is a bridging loan. Typically (and I admit my knowledge is from decades ago and another country) the bridging loan isn't time restricted but all the risk sits with the borrower - it's like a game of musical chairs, if the music stops (i.e. market crashes) and you're left unable to pay back the bridging loan, you're screwed in the sense that you have to continue repaying the bridging loan for some time.

I have no idea how the CBI treats bridging loans w.r.t. LTV/LTI limits, maybe they roll them into their exemptions.

If you can't get bridging finance then you're back to completing the sale before the purchase. This is called being in a chain. The chaining is really between solicitors, it's like a row of dominoes that goes on until you hit someone not in a chain, i.e. FTBer or cash purchaser or someone with bridging finance. Once the first sale in the chain completes, all the other sales complete in very short succession (i.e. almost immediately).

So that's basically it: either run two overlapping mortgages if you have the LTV/LTI capacity, get bridging finance, or be in a chain.

James Bond Junior

A trip to a QFA or mortgage broker is what is needed here. Thanks for all the replies folks!