There is currently a lot of press coverage about negative equity. We thought it would be worthwhile to do a quick overview of this for illustrative purposes.
In November 2008 the average mortgage was €259,217. This was most likely borrowed at 90% loan to value, resulting in a property purchase price of €288,801. According to Ronan Lyons (Economist with Daft.ie) prices across Dublin (as an example) are down 35%.
This would imply a house value of €187,994 and negative equity in the above example of €71,223.
The mortgage we assume was taken out on 1/11/2008 and the outstanding capital balance is €252,843 at 31/12/2009.
If someone is fortunate enough to have a job in the current climate they are benefiting from the lower ECB rates. Since November 2008 base rates have gone from 3.75% to 1%. This would result in a monthly saving of approx €575 per month.
If we assume that rates are going to stay the same for 2010 and increase by 1% in 2011 and another 1% in 2012 then the monthly savings will be as follows:
-2010 – €575 per month
-2011 – €375 per month
-2012 – €150 per month
For the purposes of this exercise lets assume that someone who still has a job and is benefiting from lower interest rate commits to putting €500 into a regular saving account. Hibernian Aviva have announced an excellent new product available from SmartQuotes.ie which allows 100% allocation, low management charge of 1.25% and no penalty for exiting early.
Over three years assuming a 4% return would result in a lump sum at the end of 3 years of €18k. This combined with capital repayments of circa €14k would result in a lump sum of €32k. This would clear 45% of your negative equity in under three years.
Contact SmartQuotes.ie to find out more about the Regular Savings Plan from Hibernian Aviva.
Assumptions:
-30 year mortgage (Capital and Interest)
-Interest rate over the next two years of 2.5%
-Ignores mortgage interest relief
Regular saver return from Aviva estimated at net 4% (after charges). This is an estimate and actual performance will depend on fund choice