herald

Wednesday 26 November 2014

How we used our houses like ATMs to borrow €30bn

HOMES were used as virtual ATMs as families cashed in on the Celtic Tiger boom, according to the Central Bank.

Up to €30bn in equity was withdrawn by homeowners who used their properties to secure cash. The money was used to fund lifestyle purchases like 4X4 jeeps, buy investment properties, holiday homes and pay down other debts.

The sheer scale of the money taken out in top-up mortgages and by borrowing more than needed when moving house was unprecedented in this country, the Central Bank found in a new study.

A total of €29.8bn was taken out in equity releases by existing homeowners between the start of 2002 and the first quarter of 2009.

Homeowner equity withdrawal is common in economies that experience sharp rises in house prices, the study by Reamonn Lydon and Bridin O'Leary found. Surging house prices between 2002 and 2007 meant that large numbers of people took out a top-up mortgage on the home.

And those who were selling up, but not buying a new home, ended up with "substantial equity" when they sold.

Collapse

The study also found that people taking out mortgages during the boom put less equity into their homes because banks and building societies required a deposit of 40pc back in early 2000 -- meaning the mortgage could only be 60pc of the property's value.

But they went to offering 100pc mortgages during the property bubble.

People also found it easier to borrow when banks started offering interest-only mortgages and mortgages over 30 years and longer, instead of 20 years.

However, the collapse in house prices has seen homeowners paying off mortgage debt rather than top-up up their home loans. "The dramatic collapse in the Irish property market means that all of these factors have been reversed, moving the household sector from one of net equity withdrawal to net equity injection," said the Central Bank.

Homeowners are now paying off their mortgages, and not borrowing, because almost half of mortgage accounts are in negative equity.

There is also a reduction in the number of mortgage transactions, a tightening of credit conditions and the reduction by households of their financial liabilities.

From the late 1970s to the early 2000s, homeowners for the most part paid down mortgage debt. However, from 2002 this country experienced one of the biggest housing bubbles in any western economy. But since 2008 there has been a 50pc fall in house prices.

hnews@herald.ie

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