Are you at risk of negative equity? Read our brief guide.
Negative equity is when the value of your mortgage is higher than the value of your property. The most recent official figures show that Chiswick property prices have yet to see a significant fall. Although the West London property market has held its value well, countrywide figures from Nationwide indicate a price fall of 5.8 % by the end of this year. The negative equity problem is not just about falling prices but is compounded by two other factors.
Firstly, it is exacerbated by borrowers who’ve paid a low, or no deposit. An estimated 10% of mortgages sold through the biggest brokers last year, were for loans worth more than 95% of the value of the property, according to the Council of Mortgage Lenders. Secondly, by borrowers paying only the interest – they will not have made a dent on their loan and may therefore owe more than the property value.
Who is at risk?
First time buyers are most at risk being least likely to have the capital to put down a deposit of up to 20%. But homeowners who have transferred debt from credit cards and personal loans to their mortgage could also be at risk.
What can you do to protect yourself?
Enhance your property to increase its value advises estate agent Christian Harper of Oliver Finn: “Making your property more presentable and attractive will make you more money. You could spend £2,000 remodelling the kitchen and add £10,000 to the value.
Don’t add other debts to your mortgage says independent financial adviser Hayley Buck: “Aim to clear any debt by your own means rather than adding it to the mortgage if at all possible and look at switching to a repayment scheme if you haven’t already done so. Most lenders will also agree to an overpayment facility to allow you to reduce the capital.” Negative equity is only an issue if your current deal is coming to an end or you want to sell. Otherwise there’s no point in worrying as you’re not affected.
What if I want to sell?
“Some people think that if they sell at less than the value of their loan, they can continue paying the mortgage as usual until it is paid off,” says Christian Harper. “But lenders insist on the funds being available to clear the loan before they will allow contracts to be exchanged.”
Upgrading to a more expensive property is one solution. If you can handle a drop on your property of say £10,000, and upgrade to one which has equally dropped in value e.g. by £50,000, then not only are you out of negative equity but you’ve also got a bargain. But if you cannot release enough equity for the substantial deposit likely to be required for the new purchase, you will most likely have to pay a higher interest rate.
What if my mortgage is coming to an end?
Price falls, along with reluctance among lenders to offer deals for more than 95%, could force people to sell at a loss and pay off the debt or face extortionate mortgage costs when their terms end. Most competitive deals now are only available to 75% or 90% loan to value.
Most lenders want to protect both their borrowers and the properties and do not want to repossess says Hayley Buck: “If you are concerned about your mortgage, speak to an independent financial advisor before contacting your lender. There can be provisions and schemes in place for borrowers in this position, plus we can negotiate with lenders with regards to rates, loan amounts and fees.”
“Several lenders have over the past few weeks withdrawn mortgage deals; others raised interest rates, leaving homeowners who are trying to remortgage facing delays and higher repayments. This week however, there have been some signs of the market easing with a couple of lenders offering exclusive deals at a variety of levels, which is a good sign of a possible recovery.”
Consider letting instead of selling
The rental market is very buoyant at the moment. Borrowers could turn a negative into a positive by moving in with friends or family and renting out their property on a short-term let.
Proceed with caution in this direction though. A move back home to mum might help with your savings but what would it do to your sanity?
