Negative equity is a term that’s positively guaranteed to strike terror into the heart of many an Irish homeowner. With so much of people’s hopes, dreams and financial security locked into the value of their homes, it’s perfectly understandable that people get the jitters when the term is mentioned. But what exactly is negative equity, what does it mean for homeowners and what can be done about it?
Basically, you are in negative equity if the value of your house is worth less than the outstanding balance of your mortgage. To take a simple example: if you took out a 100%, interest-only mortgage on a €300,000 house at the height of the market in 2007, and say that the value of that property has now fallen to €250,000. As you have made no repayments on the capital borrowed, only the interest, you would now be in negative equity to the tune of €50,000 – that’s the difference between your mortgage balance and the current market value of your house.
However, most homeowners will have borrowed a smaller percentage of the value of their home, usually 70-90%. This gives some leeway as values fall: a more typical 80% capital-and-interest mortgage on the same property would yield a current mortgage balance of €240,000 – €10,000 less than the current market value. Nevertheless, if you bought a property at the height of the market in 2007 with a mortgage greater than 85% of the value then there’s a good chance that you’re in negative equity. If you’re not looking to move house or raise money secured against your home and you can continue to make your monthly repayments, however, negative equity probably won’t affect you in the short-term. But there are things you can do now to help ensure that negative equity doesn’t affect your future financial freedom and security. The most important thing is to ensure that you continue to make your monthly repayments. If you are on an interest-only mortgage then your repayments will be having no effect on reducing the capital you owe. So, as property values fall, your level of negative equity rises. You should ask your financial adviser or lender about the possibility and financial practicalities of switching to a repayment mortgage. This could then begin to narrow the gap between your home’s value and the outstanding balance of your mortgage.
The money you are using to pay off your mortgage is coming from the money you earn, so it makes sense to take steps to protect your income. One of the best ways of doing this is through a form of insurance called Income Protection. This insures your income against the possibility of you suffering an illness or injury which prevents you from working and earning an income for 6 months or more. While many employers will provide some form of sick pay, this very rarely lasts beyond 6 months. For further information go online and get a quick quote at SmartQuotes.ie.
After that you could qualify for State Illness Benefit, but at just €9,776 per annum in 2009 this is highly unlikely to cover a typical mortgage. If you’re self-employed you don’t qualify for State Illness Benefit at all. Income Protection provides you with an income that can be up to 75% of your net relevant earnings, allowing you to meet your most immediate financial responsibilities such as your mortgage, loans and utility bills, as well as day-to-day living expenses.
Also, if you have a Mortgage you will have Mortgage Protection. Life Assurance rates have come down significantly in the last number of years due to a more competitive marketplace. A recent issue of the Sunday Business Post highlighted that savings of up to 30% can be made by reviewing your Life Assurance. It may therefore be worthwhile reviewing your cover to see if you can obtain a lower monthly premium.
The cover you took out with the bank at the time of taking out your Mortgage may not be the most competitive available. It is important that borrowers realise that they have a choice, and that they were not under any legal obligation to purchase these types of products from their lender only.
The average monthly premium for Mortgage Protection is €60 per month. A saving of 30% would equate to €18 per month.
In addition SmartQuotes.ie also offers 70% off the first twelve months premiums. For someone paying €60 a month this is a minimum saving of €504 in the first twelve months. This saving in the first twelve months could go towards a holiday, savings or paying off your credit card for example. Contact SmartQuotes.ie on 01 6853813 to get a quick quote.
