What are the chances of being able to trade up if you bought your house during the boom? Not great, according to new figures from the Central Bank of Ireland.
More than 40% of those who bought in 2007 were still in negative equity by the end of last year. This is despite a rebound in house prices since 2012 and the fact that, seven years into their mortgages, boom-time buyers now owe a lot less than they borrowed originally.
Even those lucky enough to have crawled back into positive territory are finding it impossible to make their next move because of a Central Bank squeeze on lending.
It requires trader-uppers to have a deposit of at least 20% of the price of their next house — an insurmountable hurdle for those who have just broken even on their first properties.
Exceptions are possible: lenders can reserve up to 15% of mortgages for borrowers unable to find the required deposit. This is not enough, however, to accommodate everyone who needs to move house — those with growing families, who changed jobs or broke up with a spouse or partner, for example.
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The lending restrictions have achieved their aim by slowing the growth in house prices since February, when the restrictions took effect.
Houses may look more affordable but only because the mortgages needed to buy them are harder to get.
Ulster Bank had some good news for customers seeking to trade up last week — provided they can afford a 20% deposit. They will be allowed to keep their tracker mortgages for up to 10 years after moving, although at a higher interest margin than previously.
The value of trackers, unavailable to new customers since the financial crisis, was also underlined by the Central Bank’s figures. They show existing borrowers pay an average of 1.05% interest if they have a tracker, compared with 4.26% if they are stuck on a variable rate.
This is a difference of €315 a month, or €3,780 a year, on €200,000 repaid over 20 years.
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The most curious figures in the Central Bank’s report concern arrears. They show 8% of all home loans are both in positive equity and in default. Why not solve the problem by selling or repossessing the properties, leaving a surplus for borrowers in the former case and for lenders in the latter? The issue is even more acute in the buy-to-let market, where 11% of mortgages are in arrears on properties that are in positive equity.
Repossession and forced sales are understandably a last resort when the property is a borrower’s home. Matters should be more clear-cut when the borrower is an investor, yet lenders appear to be even more reluctant to repossess buy-to-lets than owner-occupied properties.
Risk assessment
The pensions watchdog issued a timely warning earlier this month about the dangers of pension tourism — the practice of moving your retirement savings to a country with more flexible rules.
The tax consequences are uncertain, according to the Pensions Authority, especially if you remain in Ireland after your pension has fled the country. Revenue requires a declaration that offshore pension transfers are bona fides and “not primarily for the purpose of circumventing pension tax legislation”.
To make the move offshore, you would need the services of advisers, consultants and lawyers, in Ireland and abroad. The more mouths to feed, the more your pension will be eroded by fees and charges.
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The Mediterranean is a favoured destination for pension tourists but can you be sure that the legal and regulatory regimes in mini-states such as Malta or Cyprus are robust enough to safeguard your pension?
Even if you choose to ignore this warning, your pension provider is likely to try to talk you out of moving your pension abroad. It will have more than your best interests at heart. Pensions are a €100bn industry in Ireland. Nobody involved wants to see any of this money leaking out of the country.
So why risk it? If you used to work for a bank or another large employer in a traditional industry, you should be concerned about the retirement benefits you left behind.
The scheme may promise a pension based on your salary and years of service but these Rolls-Royce schemes are ruinously expensive for the companies that operate them. If they decided to pull the plug, your pension could be worth very little.
It is possible to be proactive, getting your money out as a lump sum before a scheme is wound up. The trouble is that Irish pension law may force you to invest the bulk of it in a retirement annuity, providing a secure but meagre income in retirement that dies when you do.
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Moving the money abroad opens the prospect of keeping the lump sum intact, allowing you to spend it as you wish in retirement, with any residual going to your family as an inheritance after you are gone. It is a tempting proposition — provided you are willing to run the risks outlined by the Pensions Authority. Of course there is the chance that you could be overreacting, bailing out of a scheme that ultimately delivers the pensions it has promised.
Unfortunately, there is no way of knowing in advance.