Portable Mortgages

Nat O'Connor: Two contradictory pieces in the news about mortgages. On the one hand, it was reported that some lenders are preparing to offer 'negative equity' mortgages of up to 125 per cent (Irish Independent). However the Central Bank proposes to restrict how much customers can borrow (Irish Examiner article and Irish Independent take on same story). Presumably, the new lending rules will make negative equity mortgages difficult, if not possible. Yet, do we want people 'trapped' in their homes, when job opportunities or other circumstances might require them to move?

An example of the negative equity mortgage goes as follows: John buys a house for €300,000 with a mortgage for €250,000. However the current market price of his house is only €200,000. Hence he is in 'negative equity'. Let's say John wants to move and has located another house priced at €200,000 that he wants to buy. Normally the bank won't permit him to sell, as his original mortgage is secured on his first house. However, the 'negative equity mortgage' is a loan of €250,000 to buy the house for €200,000. In other words, John ends up in the same position of negative equity but gets to move to a new house.

The negative equity mortgage could be a good thing, if it allows John to move to where there are job opportunities or if it allows him to move closer to his social networks. Currently, renting is not going to cover the mortgage, so it's not a viable option. Hence, John is either stuck in his first house or he needs to sell it.

But there are risks. The first risk is that house prices may continue to fall. But that's not a major problem as that would affect John in his first house anyway. The worst scenario would be if John bought a new property for €200,000 that was more over-priced than his current house, but it's really John's responsibility to shop around and get advice.

The second risk is that John will incur extra costs in moving that will weaken his ability to pay his mortgage. Stamp duty is the main cost there. Brian Cowen recently strongly defended his decision to not cut stamp duty, but it is a significant barrier to labour mobility. (Aside: Mr Cowen argues that the tax dampened property prices and speculation. It may have deterred quick buy-and-sell of property, but it seems likely that much of the pricing of houses was designed to recover the cost of stamp duty; so stamp duty may actually have boosted price inflation rather than dampened it. At any rate, it might be phased out in favour of property tax. The sooner the better).

Another cost is that John might lose first time buyer's mortgage interest relief (if applicable to his first house). And moving house inevitably costs money (from movers to legal fees), but then again John has to compare his income in the first house and his income in the second. If a job opportunity beckons, it might be worth the cost. Of course, there are many other factors in the cost-benefit analysis. The new house might be closer to friends or family, or to schools, or whatever.

A third possible risk is that people would seek a negative equity mortgage as a way of gaining access to cash. In our example, that might involve John seeking to borrow €275,000. This could be to pay the stamp duty or it could be to get cash for doing up the new house. In any case, there is a risk that adding to his mortgage debt could be the final straw and bring about an inability to pay.

Despite the above risks, it seems likely that there are some scenarios where something like the negative equity mortgage would be a good thing. If the proposed central bank regulations do not permit this to occur, then maybe some other options need to be considered. For example, in other countries mortgages can be portable. The legal detail is different, but it would work the same way as the above scenario. John would simply move his existing mortgage and secure it against the new house. He'd buy the house for €200,000 and still owe his bank €250,000.

Portable mortgages would also prevent a situation where people 'top up' their mortgage and take on extra debt. It would also benefit those who have mortgages without negative equity. Overall it would be a way of getting movement in the property market. Hopefully the Central Bank's rush to control risk will not elimate the possibility of innovative solutions to the housing crisis that could allow people to continue to make choices to improve their own situations.