Negative equity is a real risk again after years out of the spotlight – and it means bad news for people buying houses. In short, negative equity is when your property is worth less than the mortgage you took out on it. That is a problem for two reasons. One, if you try to sell a property in negative equity, you still owe your mortgage lender the difference. Two, if you own a home in negative equity and come to the end of your mortgage, you may struggle to get a new homeloan and end up paying even more. That is because you may get stuck with your current lender, which normally means falling off your mortgage rate and onto a more expensive higher standard variable rate (SVR). In other words, you can’t sell, you can’t move and you are stuck paying higher monthly mortgage rates until you get out of negative equity again. Average first-time buyer will take over 7 YEARS to save for a house deposit, shows study The issue is more of a problem for first-time buyers ( Image: SCU) Lewis Shaw, founder of broker Riverside Mortgages, said: “Categorically, you can’t remortgage if you’re in negative equity.” The risk is greatest for people with big mortgages and little equity in their homes. Most of this group will be recent first-time buyers, who may have a mortgage of 95% of the cost of their house. That leaves very little buffer if house prices fall. However, these problems have faded from many people’s minds, because the last negative equity crisis was in the late 2000, and the one before that was in the early 1990s. Around 345,000 homes were repossessed during 1990 and 1995 as a result. How likely is widespread negative equity? Negative equity may become a reality again next year, experts say – because house prices are starting to fall. House prices in the UK fell at their biggest rate in more than two years in November, according to Nationwide this week. The average house price fell by 1.4% month on month in November – the biggest drop since June 2020. It follows a 0.9% monthly fall in October. House prices see biggest drop in two years as growth slows after Mini Budget Tom Bill, head of UK residential research at estate agent Knight Frank, said: “We expect house prices to fall by 10% over the next two years and the reality of higher rates will bite more after Christmas.” Around 190,000 homes will fall into negative equity if houses prices fall by 8%, according to the Resolution Foundation. If property values drop by 18%, 600,000 homes will be affected. What to do if you are in negative equity Your first step should be to talk to your mortgage lender and see what options they offer you. You may be able to do a ‘product transfer’ – i.e. swap to another mortgage with the same lender – and not pay high SVR rates. Lenders may be able to swap you onto an interest-only mortgage for a while, for example, which would save you money. Another option is a negative equity mortgage – but these are rare. Otherwise you’ll have to try to wait the problem out. Nearly half of UK households plan on cutting back this Christmas as cost of living bites HSBC to close 114 banks next year – see full list of affected branches Shaw said: “Suppose a homeowner finds themselves in negative equity where the value of the outstanding loan is equal to or more than the value of their home. In that case, some lenders may still have product transfer rates available, but in other cases, it will mean they’ll have to move onto the standard variable rate and sit there until the situation improves.” Chris Schutrups, founder at broker The Mortgage Hut, added: “Should a borrower find themselves in the position where prices have fallen and they do not have the option to remortgage away they will generally, but not always, have the ability to do a product transfer with their existing lender that will normally not require further underwriting.” Put simply, if you want to get out of negative equity you need to get to the stage where your property is worth more than the outstanding mortgage. As such, you have a couple of options. The first is to reduce the size of the mortgage. Cost of Living Our Cost of Living team of experts are here to help YOU through a very difficult year. They’ll be bringing you the latest money news stories and also providing specialist advice. Whether it’s rocketing energy bills, the cost of the weekly shop or increased taxes, our team will be with you all the way. Every Thursday at 1pm they will take part in a Facebook Live event to answer your questions and offer their advice. Visit facebook.com/dailymirror/live to watch. You can read more about our team of experts here. If you have a question – or want to share your story – please get in touch by emailing [email protected] . If you’re on a repayment mortgage you will eventually clear that loan in full and own the property outright if you can keep up the monthly repayments. If you’re on an interest-only mortgage, things are trickier – as the only way to get out of negative equity is for house prices to rise again. Generally this will happen over time, but it’s not guaranteed, and as long as you meet payments your debt won’t be called in. Overpaying your mortgage can get you out of negative equity quicker, if you can afford to. Most mortgages allow you to overpay by up to 10% a year, or £500 a month, without incurring any additional charges, but check with your lender first. The other route is to look at ways to increase the value of your home. This is obviously risky. There is no guarantee that spending money on something like an extension or a new kitchen will bump up the value of your home enough to get you out of negative equity. But if you can afford to, it may make a difference. Read more Cost of living Martin Lewis issues verdict on bills Renters warning Cost of living payment delay Brits may be asked to limit energy use
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Published on : 2022-12-04 07:00:00
Source :mirroruk
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