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Your Money > Mortgages Articles > Beat the negative...
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By Rebecca Atkinson
The continued dive in house prices has left almost a million people in Britain owing more on their home than it is worth, according to the Council of Mortgage Lenders. Around 900,000 people owned a home which had a value less than their mortgage at the end of 2008. The CML, which represents most of the biggest lenders, said the number may have risen as high as 1.18m by the end of February. There are widespread fears that this figure coulds rise above two million by next year - half a million more than at the peak of the last housing market recession in 1993. Last month, a leaked report from financial forecaster Numis Securities warned that the housing market bubble could eventually see property values slump by a total of 76% from their peak in 2007. This means house prices could fall by a further 55% – pushing up to six million homeowners into negative equity, the report said. What to do if you're in negative equity The forecast is extreme – previously even bearish commentators, such as Capital Economics, have predicted prices will eventually fall 35% below their October 2007 peak. The latest house price index from Nationwide shows that the price of a typical house slumped by 17.6% between February 2008 and the same month this year, down to £147,746. The latest figures mean that the average value of a house will fall below the fabled £100,000 mark. On a regional scale, the picture is more depressing. Some towns such as Blackpool have seen falls of up to 28% in the past six months alone, while values in nearby Accrington are down by 22%. Even upmarket towns such as Windsor, Lewes in East Sussex and Hertford have suffered, with prices falling by 21%, 22% and 26.5% respectively. Simon Rubinsohn, chief economist at the Royal Institutation of Chartered Surveyors, says that while falling values have attracted more interest from potential buyers, the threat of unemployment along with a lack of available mortgage credit continues to leave the housing market stagnant. Restricted mortgage lending continues to fuel price falls. According to the Council of Mortgage Lenders (CML), only 23,400 loans for house purchase completed in January, down from 48,600 in January 2008. "The drop in new home loans highlighted in the CML's data clearly demonstrates the fundamental problem in the mortgage market at the present time,” says Rubinsohn. “Buyer enquiries have risen for four successive months according to RICS data but there has been little follow through on aggregate lending.” The important thing to remember is that, unless you need to sell or are coming up for remortgage, house price falls are on paper only. Daniel Lee, chief executive of property website Globrix, says homeowners shouldn’t panic: “For many this will simply be a paper loss, so if possible they just need to sit tight. Sellers also need to remember that if their property has fallen in value by 20%, the property they’re looking to buy will almost certainly have fallen in value as well, so the figure shouldn’t be looked at in isolation.”
However, for those facing the prospect of negative equity, the situation is likely to be causing concern – especially if your current deal is coming up for remortgage. While mortgage rates are looking attractive at the moment, largely as a result of the Bank of England bringing down the base rate to an all-time low of just 0.5%, unless you have built up a decent equity stake in your home you are unlikely to be offered a new deal. Best-buy mortgage rates are nearly all for people with at least 40% deposit or equity stake. While there are deals for people who need to borrow between 75% and 90% of their property’s value, these are a lot more expensive.
Ray Boulger, senior technical manager at John Charcol, says that 75% loan-to-value mortgages (i.e. 25% equity) is the key threshold. “People only seeking mortgages of 65% to 70% will have a wider choice,” he explains. “But people close to the threshold may struggle as house price falls could push them into higher loan-to-value requirements.” If you are coming up for remortgage, then it’s vital to think about how you can beat falling house prices and increase the amount of equity you actually hold in your home. If you are on an interest-only mortgage (i.e only paying off the interest rather than the loan capital) then your monthly payments are being used to clear the interest on the loan, not the mortgage itself. This means that the mortgage itself never gets any smaller and you won’t be building up any equity in your home. If you can afford to, it is well worth switching to a capital repayment mortgage so you can start eating into your mortgage debt. Contact your lender to see how making this move will affect your repayments and then do a budget to ensure you can afford it. There are a few points to bear in mind if you decide to switch your repayment plan. First of all, you may be charged a fee of up to £100 for switching. Secondly, you may not be able to switch back to interest-only down the line and you’ll certainly find it very difficult to release any equity from your home in the near future, especially if you haven’t built up much equity. Finally, it is always worth having an emergency savings fund or buffer that you can call on if you need money so don’t overstretch yourself. Another way to increase your stake in your home is to make overpayments. The majority of lenders allow overpayments, typically up to 10% per year either in a lump sum or on a monthly basis. Others, like Northern Rock, allow you to make unlimited overpayments without penalty – although you will still be charged an early repayment fee if you pay off all your mortgage early. Check with your lender to see how much you are allowed to overpay a year. Don’t forget that if you exceed your overpayment allowance you will be hit with an early repayment charge, typically around 2% to 3% of your outstanding balance. If you have a tracker mortgage then you will have seen your monthly payments decrease over the past six months in-line with Bank of England base rate cuts. Your lender will have automatically reduced the amount of money you have to pay it each month – but rather than let this money languish in your current account or get frittered away, it is worth considering putting it back into your mortgage. This will count as an overpayment so check with your lender to see how much you are allowed to increase your monthly payments by. Also, if you have more expensive debt elsewhere (for example, on a credit card or personal loan) then it might be more worthwhile using the savings from your tracker to pay this off first, as the interest rate is likely to be higher. Some historical forms of credit might not allow you to repay the debt early, however, so bear this in mind before taking action. If you do find yourself in negative equity, don’t panic. While you won’t be able to remortgage and get a new fixed or tracker discount deal, your current lender is not about to kick you out in the street. Instead, you’ll find yourself moved onto their standard variable rate (SVR). Your lender will contact you to let you know what your SVR is. A word of warning While many people with low or negative equity are being forced to sit on SVRs because they can’t remortgage elsewhere, mortgage brokers also report a large number of people are opting to stay on SVRs in anticipation that new mortgage deals will soon become cheaper. Matt Andrews, managing director of Moneyworkout, says 12% of its enquiries in February came from people planning to stay on their SVR even thought they had enough equity to remortgage. However, while their SVR may be cheaper in the short-term, there are concerns that falling house prices could reduce their opportunities to remortgage. Andrews says that customers sitting on SVRs have an average equity stake of 24% - so while they should still be able to find a new deal, they are sitting on the cusp of the market. “With SVRs lower than most new remortgage products it is extremely tempting to stay where you are and enjoy the low rates, comfortable in the thought that you will fix when rates start to increase,” says Andrews. “You must also think about your property value – as house prices fall, the value of your property in relation to your borrowing increases.” What this means is that as your property value falls, the equity stake you have in it also decreases. The smaller the equity stake you hold, the higher rate you are likely to pay on a mortgage as you move up the LTV bands. David Hollingworth, mortgage expert at London & Country, is also concerned about the number of people taking a short-sighted approach to their mortgage, by sitting on their SVR. “People are hoping to see cheaper mortgage rates down the line, but personally I don’t think deals will get much cheaper,” he says. “Even if mortgage rates were to drop a few percentage points, this saving is nothing when compared to the additional price you’ll pay if you fall into a higher LTV band.” If you are in a position to get a new mortgage deal, then the advice from both Andrews and Hollingworth is to take action now by locking into a new fixed or tracker-rate deal. “You may have a fantastic SVR now, but look at your LTV, look at property prices in your area and how they are moving - if your mortgage may cross the 80% boundary with the fall in property prices, you may want to consider fixing now, before its too late,” Andrews explains. 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