With the average house price having fallen more than 20 per cent since its peak during the summer of 2007, thousands of homeowners are now finding themselves in negative equity (ie their mortgage is worth more than their property).
It's an unpleasant place to be – not least because it leaves you unable to sell your home, unless you've got the cash to make up the shortfall between your home loan and the property's current value. However, if you think you may be in negative equity, there's no need to panic – you may have more options open to you than you think.
Does it matter?
If you've no intention of moving home any time in the near future, and you're able to keep up the payments on your mortgage – then negative equity doesn't necessarily have to be anything to worry about. At some stage, property prices will stop falling, and will hopefully begin to recover – and as long as you've got a repayment mortgage, then you can take comfort from the fact that you'll be moving yourself back towards the black every time you make a monthly payment. You can also pull yourself out of negative equity much quicker if you're willing to make additional payments to your mortgage.
Another problem for people in negative equity is that they'll struggle to get a remortgage offer once their current deal comes to an end. Even those who have less than 10 per cent equity left in their property will find it difficult to get a new offer. According to David Hollingworth, of the fee-free mortgage broker London & Country, there is currently only one lender, the Clydesdale Bank, that is officially offering mortgages to customers who need to borrow up to 95 per cent of their property's value. Beyond 95 per cent, there are no lenders publicly offering new loans.
The first thing to remember if you're in this situation, however, is that there's no need to panic. Once your current deal comes to an end, you'll simply switch onto your lender's standard variable rate. After the recent rash of Bank of England rate cuts, most lenders now have SVRs of between 4 and 5 per cent – so there's a good chance your monthly mortgage payments will fall once your current deal ends.
"The advantage of slipping onto SVR is that rates are cheap at the moment, with some lenders such as Nationwide and Lloyds TSB charging only 3 per cent," says Melanie Bien of the independent mortgage advisers Savills Private Finance. "There are no early repayment charges or fees to pay – and with many arrangement fees typically around the £1,000 mark, that could be a considerable saving."
Hollingworth points out, however, that it's important to not get too comfortable paying your lender's SVR, as this can change at any time – at the lender's discretion – and is certain to rise once the Bank of England rate starts increasing again.
Although it's possible that the Bank rate falls again before it rises, economists are now polarised over which way rates are likely to go over the next year. Some believe we are at risk of heading towards deflation (ie the prices of goods and services will fall), in which case, rates are more likely to fall to 0 per cent (from their current all-time lows of 1 per cent). However, others believe that the Bank's attempt to increase the money supply will create a return to inflation and raise interest rates.
The other risk for lenders remaining on their SVR is that if property prices keep falling, they will find it even harder to get a new mortgage (as the size of their loan will continue to increase relative to their property's value).
Clearly, some borrowers will have no choice but to put up with their SVR – if they're deep in negative equity. But even if you're sure you're in negative equity, it's worth talking to your existing lender about whether they can offer you a new deal before you give up hope.
Hollingworth says that some lenders will not be too concerned about how the value of your property has changed since you took out your last mortgage – especially if they can persuade you to take on a new fixed-rate deal that is more expensive than your current SVR.
"Some will just offer you an ongoing rate without requiring a new valuation," he says. "Even if you borrowed 90 per cent two years ago, there is still a good chance that your existing lender will give you another offer."
Coventry Building Society, for example, is known to have offered remortgage deals for existing customers who have little or no equity left in their property. You won't find details of any such deal advertised on their website, but you might be surprised what they offer you if you give them a call.
If you believe that your property has been undervalued by your mortgage lender, don't be afraid to challenge your lender. "Down valuations are a big problem in the current climate – with surveyors being ultra cautious for fear of comeback at a later date if they overvalue the property," says Bien. "Lenders will probably want your property valued before agreeing to a remortgage but you should research comparables – preferably evidence of three sale prices, not asking prices, of similar properties locally within the past couple of months, which you can give the surveyor. This can be useful if the lender doesn't even send a surveyor but simply refers to the Halifax house price index: if you can prove that your property would be worth more because of significant improvements you have made, for example, this may help your case.
"You are within your rights to ask for a surveyor to view the property if you are not happy with the desktop valuation but there is a danger that the value of the property will be marked down even further, so you end up in a worse position than you were in before."
Need to move
If you need to sell up, but don't have the cash to make up the shortfall between your mortgage and your property value, then one option is to rent out your home.
Be warned, however, that you will probably be in technical breach of the contract with your mortgage lender if you don't tell them about your plans first. Furthermore, if you do decide to tell them, they could reject your request – and even start repossession proceedings if you try to go ahead with the move.
Hollingworth says that a lender is more likely to approve your request to rent out your property if you've got a good reason – ie you've been relocated by your employer. However, they're less likely to accept your request if you've just lost your job, and want to take some of the financial pressure off by letting out your property, and renting somewhere cheaper.
Struggling with payments
If you're struggling to keep up with your mortgage payments, it's important to seek advice and to talk to your lender at the earliest possible opportunity. If it's a temporary problem – ie you're between job contracts – your lender may be happy to allow you to take a few months off repaying your mortgage, or may be willing to accept reduced payments. They may also allow you to switch onto an interest-only deal, which means you'll only be paying the interest on your loan each month, rather than paying down some of the capital as well.
However, if you're in more serious long-term difficulties, don't assume that you're going to lose your home. Over the past few months, the Government has been working on a number of initiatives to help people who are struggling with their mortgage.
For example, if you've been on income support or jobseeker's allowance for 13 weeks or more, and you've got a mortgage of less than £200,000 – then you should qualify for a payout to help cover your mortgage interest each month. You can find out about this from your local Jobcentre Plus.
Another new initiative is the Mortgage Rescue Scheme, which aims to help "priority cases" – such as people with dependents or disabilities – stay in their homes, by buying some or all of their property and letting them pay an affordable rent on the part that they sell.
In April, the Government also plans to launch the Homeowner Mortgage Support Scheme, which will help to provide lenders with more flexibility to allow their customers to defer payments if they run into difficulty.
Bear in mind that even if you don't manage to secure help from any of these schemes, and your lender starts repossession proceedings, there is a lengthy process to go through before you lose your home. Around half of all repossession orders are rejected by courts – and if you've got the will to get back on track with your payments, there's every chance you'll be able to stay in your home.
If you are running into financial difficulties, however, it's important that you take advice. Charities such as the Consumer Credit Counselling Service ( www.cccs.co.uk) and Citizens' Advice Bureau ( www.citizensadvice.org.uk) can give you independent advice and can contact lenders for you on your behalf.