Sam Dunn: 'Can we still move house?'

House Doctor

Wednesday 18 March 2009 01:00

Question: We bought our home for roughly £215,000 on a 90 per cent loan-to-value mortgage in early 2007, and then extended the mortgage by another £15,000 for a revamp as it had some structural problems. But we had the property valued last week and are now in negative equity. We'd planned to buy a slightly smaller place but now presume that it's impossible because we owe more than our home's worth. Is there any way around this? SV, Shropshire

Answer: There's nothing like negative equity to send chills down a home-owner's spine. The phenomenon, when the size of your mortgage is greater than your home's value, earned its slot in the history books during the last UK recession in 1991-92. Crashing prices coupled to hefty interest rates and soaring unemployment badly hurt many households unable to meet repayments, and led to record numbers of repossessions.

Today, negative equity already bedevils hundreds of thousands of home owners, because house prices continue to slide – earlier this month, Northern Rock conceded that a third of its mortgage customers were already in it – but, as yet, economic conditions are nowhere near as dire as 17 years ago.

Whether you can slip the negative-equity noose will depend on any financial firepower you might have saved elsewhere, warn brokers. "If you have to sell, you'll need to pay the lender the shortfall between your outstanding mortgage and the selling price," says Melanie Bien of the broker Savills Private Finance. "Much will depend on any savings you have available, because even though you're downsizing to a smaller property, you'll need to pay your lender this outstanding balance, plus a deposit for your new property."

As lenders are today unwilling to lend at higher loan to values, you will most likely have to put down at least 10 per cent of the purchase price, if not more. And it's also likely that the mortgage you bagged in early 2007 is pegged at a much lower rate than today's loan deals for those without equity. If you don't have the kind of cash needed to "buy your way out", suggests Richard Morea of the broker L&C, then moving to a new home is unfeasible.

"You'll be better served by staying put with your current lender; even if you go on to its standard variable rate, this is also likely to be cheaper than current deals." By staying put, you can grab the lowest mortgage repayments available to you; this way, you should end up with disposable income you can use to reduce your mortgage by overpayments (but check to avoid penalties).

Admittedly, it'll probably take some time – a year, at the very least – to whittle your mortgage down to a sum where a move is possible, although any improvement in mortgage availability in the meantime could easily bring that date forward.

Question: My son knocked over a paint tin in our living room and damaged the carpet. I claimed on our home insurance but was horrified to find that we're not covered... how is this? I thought accidental damage was a standard part of every policy. FR, Cambridge

Answer: I'm afraid that this is an expensively learnt lesson. It's simply a case of checking policy details – dull, but duly warranted. Some policies feature accidental damage as standard, but vast numbers don't.

"Everyone's requirements are different: young professional couples won't be nearly as accident-prone as a family with youngsters, and won't need it," says Lana Clements, a spokeswoman for More Than.

Something tells me you'll be sure to read the fine print of your home insurance at next year's renewal...

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