Liam Croke: nice house, nice mortgage...I’ll take it!

You can pretty much buy anything second hand can’t you? A car, books, a house, the list goes on, but what if you could buy a mortgage second hand?

You can pretty much buy anything second hand can’t you? A car, books, a house, the list goes on, but what if you could buy a mortgage second hand?

Seems pretty far-fetched, doesn’t it, but it actually isn’t, because there is such a thing called an assumable mortgage which allows the buyer of a property to not only buy a property but also take over, or assume the mortgage from the person selling the property as well.

How great would it be if you could agree the purchase price of a property and then take over the sellers’ mortgage as well, particularly if it was a tracker one?

How much more valuable and attractive would the property be worth for the vendor if they could sell their mortgage as well?

I met a couple this week who were renting a property from a friend of theirs for the last couple of years. The friend bought the property with her then boyfriend but things didn’t work out so they split up, and she moved away from Limerick for work reasons and now rents it out to this couple.

The mortgage outstanding is c. €155,000 and the term remaining is 23 years. The repayments are based upon a tracker rate of 1.5% which means monthly repayments of €664 excluding tax relief.

The value of the property at today’s prices is about €135,000 so if they agreed to buy the property from her they would be paying about €20,000 more than what it is currently worth.

But, and here is the interesting thing, if they simply took over the mortgage and repaid their friends mortgage at €664 per month, they would pay back €28,367 in interest payments over the 23 years remaining on the mortgage.

IF they were to take out a new mortgage for say 90% of the value of the property now, they would be borrowing €121,500 (€135,000 x 90%) and based on an average variable rate of 4.5% over the next 23 years, their monthly repayment would be €707 per month, and here is the thing - the amount of interest they would pay back to their lender would be...€73,741.99.

Yes, even though they would be borrowing €33,500 less, they would be paying €45,374.99 more in interest payments and €43 more every month on their mortgage repayments.

So, wouldn’t it be great for all parties involved? The seller doesn’t have to come up with €20,000 in this case if they wanted to sell their property to make up for the negative equity they have and the buyer would have a cheaper monthly repayment, a great tracker mortgage which saves them thousands of interest payments in the process.

Obviously the big win for the buyer in a scenario like this is the terms of the sellers’ mortgage might be much more attractive; in the case of a tracker mortgage, this would certainly be the case, over what they would be offered if they applied for a new mortgage.

I wonder how many people who are trapped in negative equity who can’t sell their house would now be able to if they were selling their tracker mortgage as well? I suspect quite a few but the conditions have to be right, for both parties.

The big concern from the buyer’s point of view is buying a property in negative equity, but, the overall cost to them is less than if they were to buy it for much less, but financed through a much higher costing mortgage.

For the seller the big advantage is making that property more attractive to potential buyers and not having to come up with a lump sum to make up the difference from what they owe and what they sell the property for.

I looked at some other scenarios at this in play just to see if this worked if the property was in deeper negative equity and again the results were surprisingly good.

For example, let’s assume my mortgage is €250,000, I have 25 years remaining and my mortgage is a tracker at 1.5% (my monthly repayment is €1,000 by the way) and the property is valued at €200,000. I can’t sell it because I don’t have €50,000 to give my bank to make up the shortfall.

Along comes my friend John, who likes my house, and is looking at other properties in my area that are going for €200,000. The house he is buying is the same as mine and he arranges a mortgage of 90% i.e. €180,000 and again repays the mortgage over 25 years (his repayments by the way are €1,000 as well)

So, which is the better deal? Buying my house for €50,000 more but my house comes with my tracker mortgage or buying a similar house for €50,000 less with a variable or fixed rate mortgage at today’s rates?

With my house, he is going to pay back the €250,000 he gave me for it along with €49,952 in interest on that tracker mortgage I sold him as well, so in total the house will end up costing him €299,952.

The house that cost him €200,000 is going to cost him c. €120,149 in interest payments, on a variable or fixed rate mortgage, assuming an average rate of 4.5% over the life of the mortgage, so the overall cost would be €320,149, a mighty €20,197 more than my negative equity house/tracker mortgage combo.

The key to a transaction such as this is that the conditions have to be absolutely right for both parties because the term and balance remaining on the mortgage you are taking over has to make sense to both parties involved.

If the mortgage outstanding is quite low with a short time period remaining then the seller is not obviously going to give the property away either and the buyer will have to come up with the balance financed through another loan, but nonetheless isn’t it an interesting concept and wouldn’t it be great if this facility was available? It might be a win win for all.

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