Moving on a minus
Sunday 24 March 1996
It is true that the conditions for qualifying for these deals can be onerous and mortgage lenders have not made great play of marketing them. But they do exist, as the Government says.
Notwithstanding the latest cautious optimism among housing commentators for an upturn in the housing market, more than a million people still find that their mortgages are greater than the value of their properties.
Most main lenders offer some kind of negative equity scheme for existing borrowers to allow them to move home, and there are also schemes available more widely (see table).
Borrowers are offered a new mortgage that allows them to sell their old home and transfer all or part of their negative equity to the new loan. Typically, this can be no more than 125 per cent of the new property's value and the whole loan is repayable at the lender's standard variable rate. Some lenders allow customers to pay back the negative equity element of their loan over the full lifetime of the mortgage. Others, such as the Alliance & Leicester, want the negative equity element paid back within 10 years.
There is often a maximum cash amount the lender will lend, which can be as low as pounds 150,000, and several lenders, such as Woolwich and Abbey National, require a 5 per cent deposit on the new loan. There may also be an arrangement fee, usually around pounds 250, on top of a likely additional mortgage indemnity guarantee payment.
If you have negative equity but need to move you should first talk to your existing lender. Even if it has no existing negative equity scheme you may be able to come to some other arrangement. But if your lender does not operate a scheme and you are unable to come to a separate agreement do not despair.
Bank of Scotland Centrebank (a specialist lending arm of the bank), Cheltenham & Gloucester and Mortgage Express (a wholly owned subsidiary of the new Lloyds-TSB group), all offer negative equity schemes available to customers of other banks and societies who are moving, while Barclays has just extended the availability of its scheme to the bank's 10 million current account customers.
These schemes are essentially the same as those offered by lenders to their existing borrowers, although differences reflect the greater risk of offering the scheme to a new customer. For example, Bank of Scotland Centrebank will lend only up to 120 per cent of the value of the property and the interest rate on the negative equity part of the mortgage is higher. Barclays asks customers to pay off the negative equity part of the mortgage within 10 years.
Cheltenham & Gloucester's scheme appears particularly attractive as it charges no mortgage indemnity premium, no arrangement fee and no valuation fee. However, the multiples are low; you can only borrow up to 2.5 times your single or joint salary.
The take-up rate on negative equity schemes has been low, although most lenders are unwilling to give any numbers. Barclays admits to 200; Bank of Scotland Centrebank to 1,000. This has been blamed on a number of factors. Borrowers have developed a siege mentality, it is said, unwilling to move on until they have cleared their debt. The schemes have been criticised for offering few incentives to borrowers in practice; mortgage indemnity premiums are expensive and the interest on the negative equity element of the loan adds to the cost, especially if it is at a premium rate. Lenders will also require a good repayment record and may set other conditions.
Borrowers should also remember that negative equity is only a problem if you want to move. Sitting tight and waiting for property prices to rise is an alternative strategy in the long term. Making extra repayments on your mortgage will reduce the amount you owe and narrow the gap between the size of your mortgage and the value of your home. For example, by paying an extra pounds 100 a month on your outstanding capital you could cover pounds 5,000 negative equity in around four years.
If you have had a mortgage for a few years your monthly repayments should have dropped, while your salary may have risen. But find out how long it takes your lender to credit the extra payments to your mortgage account. Lenders may only do so once a year, in which case you may be better off putting the money into a savings account where it can earn interest until the year-end.
With savings rates so low it is sensible to use any "spare" money to make a lump sum capital repayment on your mortgage. Find out the minimum amount your lender accepts.
Whichever the case, the sooner you take positive steps, the quicker you will free yourself from the negative equity "trap".
Where to get them
Lender Contact Maximum loan Interest rate on negative How long to pay off Who can apply equity element of loan negative equity
Bank of Scotland Financial 120% SVR* + 1.5% Full length of mortgage Anyone
Cheltenham & 0800 272131 125% SVR* Up to 20 years Anyone
Mortgage Express 0500 111130 130% Base rate + 1.9% - 2.5% Full length of mortgage Anyone
Barclays Mortgages Local branch 125% SVR* Up to 10 years Barclays current account holders and existing *SVR - standard variable mortgage rate borrowers
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