If you didn’t like 100% mortgages you’ll loathe negative equity mortgages

I was interested in the front page of today’s Independent in which Charlie Weston broke a really big story about Irish banks being in advanced stages of designing ‘Negative Equity Mortgages’ (this is vastly different than the Negative Equity Loan/Short Sale Loan we have discussed previously). Essentially the bank will allow an individual to carry negative equity out of one property and move that onto another one within certain parameters.

This practice has already existed in the UK and is offered by Nationwide, Coventry and RBS, the schemes have not proved to be very popular, in part because of the stringent underwriting required. It is one thing for a client to fall into negative equity but another to actually facilitate them in compounding that fact and taking a further bet on their ability to repay. What do I mean by that?

First Loan: €200,000
Value: €150,000
Neg/Eq: €50,000

Then the €50,000 shortfall is passed into a second loan of (for example) €200,000 (which by nature will essentially be a 100% mortgage) and now they owe €250,000 with €50,000 negative equity in place the day they close.

In this case the borrower now owes more but they have a different property which they are more happy with and underwriting will ensure that they can still service the loan, but how many people will be willing to take up such a product? And who will the bank be willing to lend to on this basis? Credit is already tight, to trust a person with yet more money and negative equity in advance is a gamble, this beast is the evil love child of 100% mortgages – the very brand of lending that was a factor in the property bubble.

The sole saving grace is that people won’t opt for it, in the UK the uptake has been incredibly low, it is a niche product with little in the way of demand, it will help the people who are happy to use it and will be of little use to the average borrower, having said that, the Regulator recently said that banks have failed to learn their lessons from the crisis and that they don’t lend enough to business and rely to heavily on property, if this is the latest in financial innovation can we truly say they are learning anything at all?


  1. Paul

    I bought a 2 bed apartment in 2006 with a 100% mortgage. I now have approximately 200K of negative equity. I will never go near a bank again for any kind of loan. I made a big mistake but I won’t be making the same mistake again and compounding my debt problems further. If it means raising a family in an apartment then so be it! Fool me once, shame on you; fool me twice, shame on me.

  2. Mossy Heneberry

    My gosh! People eem to have no problem signing away their wealth and futre wealth as well just to get their dream home. Who said renting was dead money.

  3. Karl,

    I don’t like 100% mortgages, but think this is great. My rebuttal is too long for a comment:


    [ps, I find your blog monstrously hard to load on my PC]

  4. Laura

    Im gona stay at home with the parents until ireland sorts out its mess. i want a mortgage badly too, but the way things are going, god knows if ill even have a job by the time this new budget comes out..im 24…

  5. JO

    Think this loan is a great idea for those of us who have only a small amount of negative Equity. Myself and my partner are only 25k in negative equity but can’t add this to a new mortgage for the next house so we’ve missed out on our dream “big” home because of it and have to save for a few more years! Hope they bring this option in for people in the same situation as us so we can make that leap towards a better future.

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