How negative equity mortgages work (the bit banks won’t tell you)

There is a lot written about negative equity mortgages, what nobody seems to cover is how they actually work or get underwritten so here is a primer on it, usual caveats apply, this isn’t set it stone, it’s the rules of thumb that will ensure your application is possible with the greatest number of banks.

Naturally the banks don’t release this information, they want it to be a ‘case by case’ product, but we have spotted the trend in terms of how they are assessed which inspired this post.

First the bad news, if you are in negative equity and want to move house you’ll need to have a deposit. Even though you might be ramping up to 175% LTV you can’t do this without a deposit on the 2nd property (that you’ll be moving into).

You’ll also need to ensure you don’t go outside of the maximum LTV allowable in the institution you are applying through.

The easiest way to figure out if your application will work or not is to do the following (other than having a deposit), multiply joint income by about 5.5 and then minus your existing mortgage and the remainder is what you can borrow.

Usual T&C’s apply, banks will reduce this figure if you have children, if you have existing loans or any other ongoing commitments and some will do less than this, but in general you can go to about 5.5 times joint income.

So as an example, we’ll take a couple with no children, they are €100,000 in negative equity on their current home valued at €145,000. They have €30,000 saved up and want to buy a new place, each earns €45,000.

Take the €45,000 as €90,000 (join income) and times 5.5 gives you €495,000. Less their current borrowings of €245,000 (the 145k property is 100k under) and you get €251,000. To complete this deal they’d need at least 10% which they have, but the limitation in terms of price would be around the €260k mark because they’d have to have a deposit, and closing costs. Hope that helps explain it!

Comments

  1. Paul

    Interesting.

    What happens if the 5.5 multiple of earnings is not even close to the outstanding loan?
    Eg. single person income of 35k per year, loan of 270k, property value 120k (neg equity of 150k).
    5.5 * 35k = 192,500
    less loan of 270,000 gives a minus figure!

  2. @Paul good point but a rhetorical question, obviously in that case they won’t get any loan facility!

  3. Ken

    My wife & I want to move house & approached our bank about same. We are in negaitve equity (€110,000 approx) but not in arreas. We gave them all the info they needed & they means-tested us. We don’t have any other loans except the mortgage. We passed the means-test & still they refused to allow us move.

  4. Stephen

    We sold our house last year and have been left with a 50K loan from the negative equity with KBC, we have been renting for past 18months but really want to buy. BOI told us we could only get 200,000 due to kbc loan but we have a joint income of 81,000. Do you know if we went back to KBC would they treat this like a home move and add it on if we have deposit?

  5. @Stephen, It’s hard to say in advance because underwriting decisions are made with far more information that I can get out of your question. Having said that, if you have a deposit, they may consider this (and assuming your negative equity payments are all up to date), because it would probably fit the criteria in terms of loan amounts, the only issue would be reduced repayment capacity because there is a set of rules for a chained transaction versus one where they calculate based on current situation minus financial outgoings. Call if you need help

  6. Sean

    Can you help with mine. Joing income is 66k. House value is 116000. Morgage left is 128000. What can i borrow?

  7. Louise

    Hi, hoping you can help!

    Thinking about approaching the bank but hoping you could offer some advice in advance of this.

    Our story is as follows;

    1 rental property- mortgage of €240k, value €100k – rent €900 per month.

    1 principle private residence – mortgage of €360k, value €180k

    We have savings (i.e. deposit) of €65k

    Combined income is €120k

    Not in arrears on either mortgage.

    No other loans

    What if anything do you think could the bank (ICS for both mortgages)?

  8. Tara

    I have a a current mortgage of 157K Property value 85K Single person earns 30K pa
    Savings of 8K
    What are my options of getting a new mortgage I’ve been turned down by KBC

  9. Michelle

    Hey,

    I have 2 negative equity mortgages with my ex – the joys!! I want to get one of them in my name. I’ve been paying it for the last 6 years alone. its for 450k, I’m on a basic salary of 110k. I’d like to move from my current provider – is it possible? The other mortgage is for 280k – my ex takes full responsibility for it and pays it but technically its still in my name too and he cant seem to get my name off it.
    Are there any options available to me?

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