PERSONAL FINANCE:IT WAS once seen as a win- win proposition, but property investment is now leaving many facing financial ruin, writes FIONA REDDAN
Investors all over the State have discovered that there is no such thing as easy money, as a combination of falling rents and increased supply means that they are finding themselves in the difficult position of having to dip into their own pocket to top up the rent to make mortgage payments, or in some cases, to make the payments in full.
It is not just amateur investors who got caught up in the hype who are in trouble, as evidenced by the collapse of property empires such as Liam Carroll’s Zoe group.
Falling rents is the biggest problem facing investors, with the latest report into the rental market from Daft indicating that rents around the State fell by 17 per cent in the year to July.
A key driver is a major increase in the supply of accommodation as developers move unsold properties into the rental market, potential sellers looking to rent rather than sell and more people leave the State to look for work. Some of the worst-hit areas include Cork and Limerick, where rents have fallen by 20 per cent from peak values.
Investors are also stuck servicing mortgages with interest rates that are high in relative terms. Most banks have failed to pass on interest rate cuts to those in the buy-to-let market, so investors have not been benefiting from historically low rates to the same extent as residential customers.
Variable rates for investors are still north of 4 per cent, despite the fact that the European Central Bank rate is just 1 per cent.
The high probability that banks will start increasing variable rates to help meet the cost of the Government’s new deposit guarantee scheme is also bad news for investors.
And, given expectations that the European Central Bank will also start raising rates late next year, investors can expect to see the cost of servicing their mortgages rise further.
Exacerbating the situation, earlier this year the Government reduced the amount of tax relief allowable on residential rental properties from 100 per cent to 75 per cent, with effect from April 7th. That means investors have less scope to reduce their tax liabilities, which have also increased due to the imposition of the income levy.
Another cost is the second home levy of €200 on each property, which must be paid by the end of this month.
While values have fallen to a level which might encourage some investors back into the market, factors such as the difficulty in getting financing, the increased deposits sought by lenders and uncertainty over the future of stamp duty are all conspiring to further dampen the investment market.
As Frank Conway, director with Irish Mortgage Corporation, points out, many people didn’t treat owning an investment property as a separate business and now find themselves caught short, risking their overall financial health and unable to meet payments on personal financial products such as health insurance and life assurance.
If, however, you find yourself stuck servicing a number of investment mortgages and can’t make all the repayments, is there anything you can do?
Talk to your bank manager
While it might be the last place you want to visit, if you are having difficulty meeting your monthly repayments, the first thing you should do is discuss your options with the bank.
Conway recommends that investors in trouble bring comprehensive income/ expenditure reports with them on this visit.
Given that banks have enough on their plate dealing with transferring property development loans to the National Asset Management Association (Nama), and indeed keeping their businesses afloat, you might find that they will be amenable to facilitating more flexible repayment options for you.
Falling into arrears is not a situation either you or your bank wants to see happening and banks are loath to repossess properties at present as it will crystallise their loss on the property. Ignoring the issue is a very dangerous approach in light of a new fast-track repossession process, which can be triggered in cases where mortgages are in arrears and borrowers fail to engage in negotiations with their lender.
“You need to take your head out of the sand and address the problem,” says John Lowe, managing director of the Money Doctor.
Go interest-only
During the boom, interest-only mortgages were very popular with property investors as they were tax-efficient, the rent they received covered the repayments each month and capital appreciation meant that when the investor went to sell the property, there would be plenty of gains with which to repay the loan in full.Typically offered on a three- to five-year basis by the banks, interest-only mortgages were frequently rolled over indefinitely.
Last year, banks started looking for some of their capital back and were pulling back on interest-only options. However, this has since come back in favour of the investor, says Conway. “What’s typically happening is that while 12 months ago, banks wouldn’t allow you to go interest only, they are now more likely to work with you.”
It’s not that banks are any less reluctant to engage in the practice, he adds, but they have become more pragmatic.
On an interest-only mortgage, you just pay back the interest every month, with no repayments on the capital part of the mortgage due until either the end of the mortgage or the end of the interest-only period. The major advantage of going interest-only is that, depending on the amount of capital you have paid down, it can shrink your monthly repayments significantly. For example, a 20-year €300,000 mortgage being repaid at 4 per cent will cost €1,817.94 a month to service, or about €1,000 on an interest-only basis. On the down side, this will add a hefty chunk to your interest payments, sizably increasing how much you will eventually have to pay back the bank, and it will also increase your exposure to negative equity.
Nevertheless, for those who find themselves caught short month after month, Conway says going interest only is a viable option as it will enable them to hold out until the market picks back up.
This may depend on how long the bank will allow you to do it. Banks are typically assessing this on a case-by-case basis.
In some cases, they may ask you to liquidate some properties or ask you to “re-engineer your spending”, as Conway sees it. Banks, he says, aren’t looking kindly on people who wish to go interest-only to keep up lifestyle spending such as driving a fancy car or taking two holidays a year.
While this option may save some investors, ultimately, “for some people time will run out”, maintains Conway.
Extend your term or take a break
Another option to improve your cash-flow is to extend the term of your mortgage, which will bring down the cost of monthly repayments. For example, a 20-year mortgage of €300,000 being repaid at 4 per cent will cost €1,817.94 a month. Pushing the term out by five years will bring your monthly repayments down to €1,583.51, or €1,432.25 if you extend the term to 30 years.
If you have several properties in your portfolio, extending the term on all your mortgages can dramatically reduce your monthly outgoings and may mean that your rental income covers your mortgage repayments.
Although in the long run such a move will significantly increase the amount you owe the bank (adding almost €80,000 if you increase the period of mortgage by 10 years), it will help you overcome your current situation.
You could also ask your bank for a moratorium, or a repayment break. While this is just a short-term solution, it may give you some relief until you find a new job if you have been made unemployed for example, or a new tenant if your property is lying vacant.
Maximise your property
One way to boost your income is to add an extra bedroom, if possible. For example, if you have a three-bedroom house with two sitting rooms, consider turning one into another bedroom.
Renting your property by the room is another way of maximising rental income.
For example, a house with four double bedrooms on the Botanic Road in Glasnevin, Dublin 9, is currently available to rent for €1,400 a month on daft.ie. However, tenants can expect to pay about €400 for a double room in this part of the city, so instead of taking on a group of tenants together, you could consider advertising on a by-the-room basis, which would bring up your monthly rent to about €1,600, bringing in an extra €2,400 a year. More hassle perhaps, but also more returns in the long-run.
Another option is to offer short-term lettings if you are looking for new tenants. If you normally rent a property for €1,000 a month, you might get €400 a week for it on a short-term basis. Daft.ie has a section dedicated to such lettings, while you could also consider posting your property on holiday websites if it is in a popular area.
Sell up and move on
While selling your property may be at the very bottom of your list of preferred options, if it is simply costing you too much money, you may just have to cut your losses. While property prices have fallen by about 50 per cent in some cases, some would argue that they have further to fall. Others maintain that, even with an upturn, prices won’t come back to previous peaks for another generation.
If you bought your property in the last five years – or even some time before this – you are now likely to be facing significant negative equity, which will reduce your options.
Selling your property in this situation may require the permission of your lender, as well as a lump-sum from you or additional borrowings from your lender to meet the mortgage shortfall. It will also crystallise your losses in the investment. According to Lowe, people in negative equity will look to hold on until house prices have risen to a level which means that their loan-to-value (LTV) is less than 100 per cent, at which point they will then be able to sell. If, however, your LTV is already below 100 per cent and you owe less to the bank than what the property is worth today – even when estimating market value by knocking an additional 10-20 per cent off asking prices in your area – then taking the hit might work better for you. If you are considering selling, you will need to sit down, do your sums and work out what price you will need to sell at to make it worthwhile. If this is a realistic figure in the current market, then it might make the most sense.
Give the property back to the bank
If you fall behind in your repayments and none of the above is an option, then the “logical conclusion”, says Conway, is that the banks will foreclose on your property.
While in the US home owners simply walk away from their properties by sending back the keys to their lender, borrowers in Ireland must see the handing back of their house to the bank through.
Having your property seized will have a huge impact on your credit rating and will severely limit your borrowing capacity in the future. Moreover, the bank can still go after you for the amount outstanding on your mortgage if the sale of the property doesn’t match the value of the mortgage, as it has a legal right to demand payment on the difference.
Given that such loans aren’t generally ring-fenced, Lowe points out that lenders will have the right to go after the borrower’s own home also, although courts are generally loath to repossess family homes.
Property charge: deadline looms
NEXT WEDNESDAY marks the deadline for the new €200 property charge on second properties. Investors who have not yet paid up for each property they own in addition to their own home need to get moving.
The charge, which was introduced in this year’s budget, is payable to the local authority in whose area the property concerned is located, but can also be paid online. The charge is applicable to holiday homes and investment properties, but does not apply to properties outside Ireland, to granny flats or to mobile homes.
If your investment property is lying vacant (as so many are these days), you are still liable to the charge and you must pay for each property you own other than your principal private residence.
So, if you have 10 properties, then your liability this year will be €2,000.
Property owners have a one-month grace period after next Wednesday’s deadline to pay up, but will incur a late payment fee of €20 a month, or part of a month, that the charge remains unpaid after this date.
If you wait until next June to pay the tax, you will then owe €360, and will be faced with another payment for 2010, as it is an annual tax. If the tax is never paid, it will become a charge against the property and that may lead to difficulties if you go to sell it.
Unlike other expenses incurred in renting a property, the non-principal private residence (NPPR) tax is not considered an allowable expense in computing taxable rental income.
It is expected that the charge will raise about €40 million annually for city and county councils, but so far people with second homes have been slow in paying the tax.
For 2010, the tax must be paid by the end of May and the charge is liable to rise in line with inflation.
For more details and to pay your charge online see: www.nppr.ie
