Plain sailing — even in negative equity

Plain sailing — even in negative equity

Posted on 04Oct


Eithne Dunne 23 Sept 2018

Your financial past might not be as much of a problem as you think when it comes to getting a mortgage.  Many borrowers worry their job status or financial history could be an albatross around their neck when remortgaging, but there’s less to fear than you might think

There are myriad reasons why you might be refused a mortgage. You may not earn enough to realistically pay back what you want to borrow; you may have a patchy credit history, an uncertain employment situation, a costly gambling habit; or indeed you might just be a really bad money manager, as could be seen by a rummage through your bank statements.

However, there are also factors that will not affect your likelihood of success quite as much as you might think.

Negative equity
Being in negative equity on your current property does not mean you are an “untouchable” when it comes to applying for another mortgage. It is still possible — given the right circumstances — to get a mortgage while in negative equity.

Joey Sheahan, head of credit at, gives the example of a couple who own and live in an apartment with a mortgage of €200,000 but a value of €180,000. The term remaining is 25 years, and the interest rate is 1.1%.

“Say the rent attainable from the property is €1,400 and the couple make a new mortgage application on the basis that they are going to let the existing property, as opposed to crystallising the €20,000 shortfall. Based on the above figures, this ‘negative’ property will not have any adverse effect on their application,” he said.

The bank will seek to confirm the estimated rental income by reviewing comparable rental properties, or by obtaining a letter from an auctioneer.

When applicants want to sell the property and carry over the remaining debt to the new loan, it can be trickier, but comes down to applicants’ financial situation.

According to Harry Dwyer, managing director at Moneycare, there is a dwindling number of applicants for negative equity-type mortgages: “Valuations have increased significantly in the past few years, and people on negative equity looking to change to a new mortgage are few and far between.”

When you trade out of a negative equity situation, you will still need to stump up 10% of the price of the new house. “Someone in negative equity could find it difficult to save that, so that’s one of the constraints,” said Michael Dowling, managing director of Dowling Financial.

The bank will lend a maximum of 175% of the value of the new house, including the new mortage and the oustanding balance on the original mortgage. Those wanting to carry forward negative equity and pay off a new loan will need big salaries. “Typically, the only people who will qualify for a negative-equity mortgage are those on salaries of €80,000 to €100,000-plus.”

Partner’s first-time buyer status 
The help to buy incentive gives first-time buyers a leg up on saving for a deposit through a refund of income tax and Dirt paid over the previous four years. According to Sheahan, there is a perception that, if your partner is not a first-time buyer, you cannot avail of the scheme. In fact, you can — if you apply for your mortgage as a sole applicant.

“There is no legislation or Central Bank of Ireland restriction that says a married person must apply for a mortgage on a joint basis,” said Sheahan. “Accepting a sole application from a married person is up to each lender’s own credit policy, and some banks do accept sole applications.”

Of course, the applicant will be able to borrow only based on their own salary — and not on the combined salaries that both partners are earning.

“The bank will assess the application using only one income, and will factor in the outgoings for the full family, so it’s more restrictive than if you were using two incomes,” said Sheahan, “but 3.5 times income is still possible.”

Assuming your income is sufficient to secure the mortgage, you may, as a first-time buyer, benefit from a higher loan-to-value ratio. You would be able to borrow 90% of the value of the home, as opposed to just 80% if you were to apply jointly with a non first-timer.

Taking your tracker with you
Most banks will now let you take your tracker rate to your new home. Granted, they will generally tack on an extra 1% but that should still work out a lot cheaper than starting on a fresh rate — and leave you in a better position to be able to meet the mortgage repayments.

“A lot of people who are on fantastic tracker rates of, say, 0.85%, think there’s no way they could move as they think they’d have to go straight on to a 3.5% variable rate,” said Dwyer.

Permanent TSB, he said, will allow you to take your tracker to a new property, providing it is within six months of selling the other property, and it will allow you to hold that rate plus one percentage point for the term of the original loan.

Not all banks facilitate bringing your tracker, so shop around. Ulster Bank, for example, will not allow you to take your tracker rate; it offers movers its ECB tracker rate of ECB plus two points — so 2% — for a period of 10 years. After that, it will revert to the bank’s standard variable rate, which is currently 4.3%.

Note that if the new mortgage is higher than your old one, the additional borrowing will attract interest at whatever fixed or variable rate you agree with your bank — not at your tracker rate.

Job permanence
You do not necessarily have to be permanently employed to get a mortgage. “There are certain occupations where permanency of employment is not in the nature of the job,” said Dowling. “For example, many doctors are on six- or 12-month rolling contracts. The same can apply with nurses or teachers. Despite this, the banks take the view that these people will always get work.”

There is no barrier to those in permanent employment who have recently switched jobs.”People think they have to wait six or 12 months before they can apply for a mortgage, but that is not the case,” said Dowling.

The self-employed 
Being self-employed does not mean you cannot get a mortgage, but most banks will require at least two years, and in many cases three, of trading figures. Your ability to borrow will be determined by your average trading profit.

“For example, if a self-employed dentist recorded a net profit of €60,000 in 2016 and €80,000 in 2017, then their past two years’ average is €70,000,” said Sheahan. “This applicant will be treated the same as a PAYE worker earning €70,000.”

There are some exceptions to the trading record rule, said Dowling. For example, when someone working in IT moves to self-employment but has a contract with a large employer for the next 12 months, a bank would still consider them.

While Pepper will also calculate the average profit over the previous two years’ trading when assessing income, it will also take into account money that a business owner keeps in the business or pays into a pension. In other words, it will look at what a person could pay themselves as opposed to what they do pay themselves when assessing income.

“For example, say you have a haulier who earns €4,000 a month and is making repayments on a tractor loan of €2,400 a month,” said Dwyer.

“Because he is not a limited company, that [repayment] will be subtracted from his income when being assessed for a mortgage. So he will be hugely restricted in his ability to borrow.

“I have seen plenty of farmers and hauliers having trouble trying to get mortgages because of this.”

Source:  The Sunday Times

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