Negative equity traps up to 300,000

UP TO 300,000 house owners could be trapped in negative equity resulting in them being unable to change mortgage provider to avail of a cheaper loan.

The days of banks scrambling to encourage homeowners to switch mortgages are long gone as mortgage holders, who purchased their homes at high loan-to-value ratios during the property boom, are likely to be trapped with their existing loan providers for many years to come.

This is according to director of the Irish Mortgage Corporation, Frank Conway, who said that in mid-2006 around 35% of all first-time buyers purchased their homes using 100% financing.

He said today all of these people will be in negative equity as house prices have fallen by 40% or more.

Negative equity prevents property mobility and the chance for homeowners to get better deals, according to Mr Conway.

“Homeowners who are in negative equity in their homes can owe as much as €200,000 or more than their property is actually worth. Despite the Government reducing stamp duty to 1% in the latest budget, it will make little difference to hundreds of thousands of property owners who are currently in negative equity,” he said.

He added that homeowners will also be prevented from shopping for a better mortgage deals or fixing mortgage rates with a more competitive lender.

“For many mortgage holders who hold standard variable rates on their homes, those who are in negative equity will be unable to move to another lender for a better deal.

“During the property boom, Permanent TSB was the largest residential property lender in the Irish market. However, today, it no longer offers competitive fixed rate deals to existing customers. Typically, to switch to another lender, a mortgage holder could not exceed between 80% and 90% on their homes,” he said.

Mr Conway also said that mortgage lenders are expected to increase interest rates for standard variable rate mortgage customers in the months ahead by as much as 1.5%. This echoes the fears of other experts who said banks could hike interest rates as early as this month.

The ESRI has estimated that around 250,000 to 300,000 homeowners are in negative equity.