Fear of negative equity haunts owners

Negative equity is not just a problem for homeowners who want to sell their homes: borrowers may also find themselves unable to shop around for better deals, writes Caroline Madden

SOME SAY it's purely a theoretical problem unless you have to sell your home, while others have compared it to burning €50,000 in cash in your back garden. So is negative equity worth losing sleep over or has the issue been blown out of proportion?

Negative equity occurs when a mortgage is greater than the value of a property. As property prices have fallen nationally by 12.1 per cent since February 2007 - at least according to the Permanent TSB/ESRI house price index which measures mortgage drawdowns - borrowers who took out high loan-to-value mortgages and in particular 100 per cent mortgages and bought at the peak have been pushed into negative equity.

In the summer of 2005, First Active broke new ground with the introduction of the first 100 per cent mortgage in the State - making it possible for first-time buyers to get onto the property ladder without scrimping and saving for a deposit.

Other lenders quickly followed suit with EBS, First Active, Ulster Bank, Permanent TSB and Bank of Scotland soon offering similar products. However, in recent months lenders have effectively withdrawn 100 per cent mortgages from the market.

It is difficult to pin down exactly how many of these loans were taken out, as no official cumulative figures have been collated and the banks have been understandably coy on the subject, but it is estimated that one-third of all first-time buyers in 2006 opted for 100 per cent finance, which equates to 12,350 home loans.

In 2007, 5.5 per cent of loans provided were 100 per cent mortgages, which amounts to almost 8,700 mortgages. So, at a conservative estimate, 21,050 homeowners have 100 per cent mortgages and are therefore extremely vulnerable to negative equity.

Of course it's not just those who borrowed the full price of their home who are at risk. Given the magnitude of the recent fall in property prices, anyone with a high loan-to-value mortgage is in the danger zone. According to Davy Stockbrokers, 69 per cent of first-time buyers in 2006, which equates to roughly 25,570 mortgages, had a loan-to-value ratio of more than 90 per cent.

Davy has predicted that 40,000 first-time buyers would face an average paper loss of €18,200 if house prices fall by 10 per cent this year. Prices have already fallen by 5 per cent in the first half of the year according to the Permanent TSB/ESRI figures and anyone in the market will tell you that where properties are selling at all the fall is far greater.

The Irish Times