Plot your course out of negative equity danger
A million homeowners are in the red but there is no need to panic, say Alessia Horwich and Julian Knight
Sunday 21 June 2009
Despite some signs of life in Britain's property market, the situation for many homeowners is pretty bleak. Recent Bank of England figures show that 1.1 million property owners in the UK are in negative equity – where their mortgage is higher than the value of their home.
That's almost as high a number as during the recession of the early 1990s. And there is no guarantee that the UK property market has turned a corner; in fact, more may slip into negative equity over the summer and autumn.
Many who bought at the top of the market have now seen house prices in their areas fall rapidly, leaving them with a house worth less than the amount they borrowed. However, in itself, negative equity is not a problem. It does not alter your mortgage repayments on your current deal and, as the market recovers, the problem will sort itself out in many cases. In fact, although the number of people in negative equity is similar to the early-1990s figures, the Bank of England points out that the total value of this negative equity is relatively small in comparison.
One factor preventing panic is the relatively low mortgage rates being charged by lenders. Repayments are often so low that overpaying is a viable option, and throwing as much money at your mortgage as you can afford is a good response to negative equity. "There's never been a better time to overpay your mortgage," says Heather Scott, a spokeswoman for Halifax mortgages. "Impacting upon your capital with mortgage rates where they are is much easier now than it has been historically."
Similarly, if you are on an interest-only mortgage and have slipped into negative equity, now is the time to switch to repayment to chip away at the capital sum borrowed. Property owners should be able to build up a good chunk of equity in their homes.
If overpaying is not an option and you need to secure a better mortgage deal despite being in negative equity, you are in a no-win situation. "If you are in negative equity at the moment your chances of remortgaging are zero," says Richard Morea from mortgage brokers London & Country. The highest LTV (loan to value) products on the market are at 95 per cent.
From the lenders' perspective, they are taking the property as security and it is simply too much of a risk for them to lend more than the value of the property. However, as long as you can meet repayments, record low standard variable rates mean most have the luxury of putting off a remortgage, at least in the near future.
What's more, selling up in a downturn is itself fraught with dangers when it comes to getting back on the ladder: "Even if you are able to absorb the downturn in house prices," says Mr Morea, "you've got to look at what will happen in your onward move. If you are looking at a high LTV, then you might be much worse off in the long run when it comes to buying another property, if you can get a mortgage at all."
If all other options have been exhausted and you do sell while in negative equity, the outstanding debt will still be owed at the commercial rate at which it was borrowed and an arrangement will be made with the lender to repay this.
Before you get to this stage, there are several options available. Renting out a room can be, for many, a quick fix that provides a tax-free income up to £4,250 per year. However, be aware that if you take in a lodger you will have to tell your contents and buildings insurer of the change of circumstance; if you don't and have to make a claim, you may find that it is rejected.
If renting out a room will not bring in enough cash, property owners can consider moving out of their home and renting it out. But as far as your mortgage lender is concerned, this can be problematic.
You will have to switch from a residential mortgage to a buy-to-let one. Before the credit crunch, that wasn't a difficult transition. But since late 2007, lenders have seen many buy-to-let investors struggle to meet their mortgage payments. In fact, buy-to-let investors are about four times more likely to default on a mortgage than an owner-occupier. Lenders are now asking buy-to-let borrowers to jump through more hoops before they will agree to the loan.
Those looking to switch to buy-to-let will usually need a substantial deposit, sometimes as high as 30 per cent. In addition, many products require rental income to cover at least 130 per cent of the mortgage payments. These criteria are a tall order for those in or even close to negative equity. Their LTVs are high, and if their properties are not designed specifically for rental they could have problems achieving the needed rental income. However, if you stay with your current lender, it may look sympathetically at you, in effect waiving some of the criteria which would apply to a normal buy-to-let investor. As Ms Scott says: "If you are coming in as a new customer then the criteria apply, but if you are in financial difficulty and renting is a viable solution to help you recover from the situation, then banks will work with the customer to try to make it happen."
In the past six months, the Government has introduced help for those struggling with mortgage repayments. The Support for Mortgage Interest scheme will pay the interest on the mortgages of those who have lost their jobs and qualify for various benefits.
To date, though, government-backed initiatives have been criticised for taking an age to set up and consequently failing to help many homeowners in crisis. Perhaps of more help is the undertaking of many of the UK's biggest lenders to keep people in their homes, even if several mortgage payments have been missed.
According to most debt and housing charities, negative equity can really bite when personal circumstances change, in particular, being made redundant or being unable to work due to ill health or injury. If you're unable to meet mortgage repayments, repossession can follow. And if you're in negative equity, you can still owe the mortgage company money. An emergency savings cushion of between three and six months' salary can make a huge difference, as can buying income protection insurance, which will pay an income should you lose your job.
Stuck: 'We're busy building equity'
Georgina Foggin, 27, a solicitor from Sutton Coldfield, bought a house with her partner in May 2005, straight after graduating. They did not have a deposit and obtained a 100 per cent mortgage on a three-year fixed interest-only deal from HSBC. The couple are now in negative equity but not all is doom and gloom.
"We've just come to the end of our three-year interest-only fixed deal, but because the SVR is so low (1 per cent above base rate), we are fortunately able to overpay significantly. We also haven't fallen too far into negative equity because we've done quite a lot of work to the property. As we are stuck here for the time being, we think it's a great way not only to add value, but also make it a nicer place for us to live in.
"One of the things that has come out of this is that we are more careful. We are not looking to move to a bigger property simply because we want more space. Instead we can see that it's more important to try to build up the equity in your property before moving on, which is what we are concentrating on now."
Independent Partners: Get fee-free expert mortgage advice and find the right mortgage deal for you.
Donald MacInnes: 'I have to have £500 a month spare from now until at least 2035'
HSBC becomes first bank to offer five-year fixed rate mortgage with interest rate under 2%
Are finance apps stealing your personal data?
Pension freedoms: How to deal with cold calls from scammers
Barclays new Blue Rewards hands cash to customers. What’s the catch?
- 1 Rarest Beanie Baby bought for just £10 at car boot sale could be sold for £62,500 on eBay
- 2 Katie Hopkins and The Sun editor David Dinsmore reported to police for incitement to racial hatred following migrant boat column
- 3 Parma, Missouri: 80 per cent of town's police quit after first black mayor is elected
- 4 Australian student Tommy Connolly, 23, adopts his pregnant, homeless 17-year-old cousin to give her a chance at 'a better life'
- 5 Google search history can now be downloaded in its entirety, mass embarrassment expected
If I’m being racially abused I don’t need a stranger with a saviour complex to rescue me
The only black face in the Ukip manifesto is on the page about overseas aid
Ukip is the only main political party to not address LGBT rights in its manifesto
Food banks: One million Britons will soon be using them, according to Trussell Trust
Religion isn't growing, it is becoming vigorous in its demise, says philosopher AC Grayling
BBC election debate: The one photo that summed up the whole 90-minute leaders debate
iJobs Money & Business
£60000 - £70000 per annum + benefits : Ashdown Group: A highly successful, glo...
£30 - 35k (DOE): Guru Careers: We are seeking a Pricing Analyst with experienc...
£24000 - £26000 per annum + benefits : Ashdown Group: A highly successful, glo...
£21000 - £24000 per annum: Ashdown Group: The Ashdown Group has been engaged b...
Day In a Page
Surrounded by woodland, this five-bedroom manor house has plenty of outdoor storage space in the form of three converted loose boxes, two smaller outhouses and a woodstore.
This four-bedroom detached home comes with a double carport, useful workshop, garden and two walkways that offer views of the adjacent countryside.
With space for an equestrian business, a greenhouse for growing your own veg, a wine store and a gym; this five-bedroom home has all the ingredients for a country retreat.
This four-bedroom home has exposed brick chimneys and a vaulted ceiling in a breakfast room that's ideal for summer entertaining - the doors open to the patio and garden.
The decked roof terrace of this two-bedroom flat is perfect for summer drinks while large windows and ample storage space make for a light and spacious interior.
Surrounded by approximately 15 acres of grounds, this six-bedroom grade II-listed home has been extensively refurbished yet retains many period features.
This four-bedroom home comes with a two-bedroom cottage and commercial office, with planning to extend, in a stunning courtyard setting.
In a pretty Norfolk village, this four-bedroom family home is surrounded by landscaped gardens, with even a self-contained annex for guests.
A few miles from the seaside at Perranporth, this four-bedroom farmhouse sits amongst nine acres of idyllic grounds - including a lake and two barns used as holiday lets.
This five-bedroom home is arranged over three floors of a converted Victorian hospital, offering spectacular views of the Pentland Hills - only three miles from the city centre.
This four-bedroom detached home comes with grounds that span to approximately 2.5 acres, as well as two large patio areas and a double garage.
This four-bedroom cottage is a Grade II-listed town house, well-located for the thriving market town of Nailsworth.
A four-bedroom apartment on the ground floor of a stunning period property in North Yorkshire, with two kitchens and a large south-west facing garden.
This high-spec two-bedroom home is part of a smart collection of new flats at Beaufort Park and has a large decked balcony that's perfect for summer drinks.
Capitalise on the fabulous views of Trevone Bay by taking two homes and creating one spacious boutique B&B. Just a cliff-top walk from Padstow.
Overlooking a golf course, this six-bedroom Edwardian detached home spans four storeys and retains many period features including the original, operational servants' bells...
On the edge of the city, this six-bedroom home comes with an outdoor swimming pool and a large garage block that has annexe potential.
In a Grade II-listed manor just outside of Bath, this three-bedroom home is arranged on two floors with a skylight in a vaulted roof line.
Open the living room's bi-fold wooden doors to reveal a retro-style kitchen, and a conservatory leading to a paved garden at this three-bedroom home.
A Grade II-listed, four-bedroom home, in a charming Somerset village, with a two-storey studio that could be converted into a holiday cottage
A modern four-bedroom Victorian home, within walking distance to the high street
A luxury apartment in the Gothic mansion of Wyfold Court in Kingwood, offers six bedrooms spread over three floors and a turret
This school conversion, near Stockwell Tube, oozes New York loft style. The one-bedroom flat features double height ceilings and exposed brick work
This six-bedroom Georgian home is on three floors with open fireplaces, a two-oven Aga, an annexe, and cottage gardens with outbuildings and a car barn
High Crest House covers an impressive 9384sq ft, with almost three acres of grounds including a tennis court and summer house enclosed by electric gates
A six-bedroom farmhouse with separate accommodation in converted stables. Situated in the village of Church Aston, within walking distance to the market town
A two-bedroom flat with under-heated walnut floors and bespoke built-in storage. The Tube and Clapham Common are a short stroll away
A refurbished seven-bedroom townhouse with staff quarters, cinema room, superb gym, steam room and plunge pool
A minimnalist four-bedroom home designed to the highest spec, featuring glass walls and a kitchen space lit by a glass roof
Hibernate during winter and make your living during the summer at this busy guesthouse with panoramic sea views, in the village of Lynton
A four-bedroom penthouse next to the Tate with direct views of St Paul's from two floors of luxurious living space
A four-bedroom detached home surrounded by spacious gardens and woodland, close to New Pudsey
An 18th-century, three-bedroom home near Langstone Harbour built from ships beams with vaulted ceilings and wood burning stoves
A five-bedroom semi-detached home with a mix of period and modern features in a popular and convenient location
This five-bedroom red-brick beauty overlooks the village green and sits in just under two acres of land
A three-bedroom villa with self-contained flat, minutes from Lake Windermere
A five-bedroom Victorian home with four receptions, superb gardens and paddock in Pembury
An eight-bedroom house on the south side of the The Green with cinema, wine cellars and summer house
This 17th century beauty is full of rustic cosiness, while the detached home office means you can also run a business
Four exclusive apartments in a Grade II-listed former medical school with 2,275 sq ft of living space and 18ft ceilings
A five-bedroom terraced house on the popular Peterborough Estate, ideally located for both Eel Brook Common and South Park
A state-of-the-art farm-building conversion on the former Cliveden Estate, with 11,420sq ft of internal space, cinema and wine cellar
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads
A boutique mews house, set around a central courtyard, with three bedrooms and a private roof terrace
A four-bedroom farm-conversion with three bathrooms and two reception rooms
A two-bedroom detached house with ensuite bathrooms and a sun-drenched decked terrace, £750,000
A modern and spacious two-bedroom, penthouse flat with two bathrooms in a prestigious development
A beautifully renovated five-bedroom terrace with three reception rooms and a courtyard garden, £700,000