Escape from your negative equity nightmare
Barely a day goes by when we don’t hear about the plight of first-time buyers in the news. But what about the last lot of first-time buyers? In recent years they’ve discovered life on the property ladder isn’t rosy. Many of the people who got generous mortgages five years ago are now sat in negative equity and struggling to remortgage.
Back in the pre-credit crunch days loans were easy to come by. Lenders handed out 100% mortgages with barely a second glance at an applicant’s financial situation and some even lent people more than the value of their home - Northern Rock, for example, was famous for its 125% mortgages.
However, once the credit crunch reared its ugly head things started to go very wrong. House prices fell and lenders, suddenly mindful of risk, all but stopped lending.
Many people who bought back in 2007/8 are now either looking to remortgage or move. But because house prices have fallen by an average of 8% since then many have mortgages that are larger than the current value of their homes, in other words they are in negative equity.
This means that if they were to sell their home they would find themselves owing the bank the difference between the value of their mortgage and the value of their home.
According to HSBC, around 36,000 first-time homeowners who bought in 2007 are likely to find themselves in this trap. And 65% of first-time buyers are unable to remortgage, either due to negative equity or not meeting lenders’ strict lending criteria, says the Financial Services Authority (FSA).
PLAN YOUR ESCAPE
If you find yourself in this position, what can you do? First, find out exactly what your situation is.
Start by getting your property valued. Most estate agents offer a free valuation service or you can instruct a surveyor to carry out a valuation, which will usually cost between £300 and £400 for a £200,000 property.
Then check your latest mortgage statement to see how much you still owe, and from that you can work out your loan to value (LTV), the value of your loan as a percentage of the value of your home.
If you’re trying to remortgage, enlisting a broker can be useful. “The more access to information you have, the more options you have available,” says Fahim Antoniades, mortgage director at Mortgage Centre IFA.
“There is no substitute for independent, whole-of-market advice to ensure access to all of the deals and understanding of the full range of options.” And it could be that putting off your move is the most sensible choice. If you don’t have any savings then hanging fire can give you a chance to save for a bigger deposit or, if your mortgage allows, to overpay and reduce your debt.
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One trend that is developing as a result of the constraints on lending and the threat of negative equity is for home improvement. “We are seeing an increased number of would-be next time buyers who, rather than sell and face negative equity, are opting for adding extensions to their homes as a means of upsizing,” says Antoniades.
“This is a sensible solution for those needing more room as the family expands - it has the effect of adding value to the home [possibly eroding negative equity], without incurring the associated costs of having to buy such as stamp duty, legal fees and other such costs.”
But if you need to move don’t worry, there are still some options available to you. The FSA believes that lenders should loosen criteria to help those it dubs ‘mortgage prisoners’ by allowing them to transfer negative equity onto a new mortgage should they want to move somewhere the same value as their current home. While many lenders are reluctant to assist, some have developed suitable products.
How much negative equity are you in?
|REGION||Average house price 2007||Average house price 2011||Total negative equity (95% mortgage)|
|YORKSHIRE & HUMBERSIDE||£154,695||£134,467||£12,493|
Source: Nationwide, 27 January 2012
There is some help out there
The Lloyds Equity Support Scheme allows existing Lloyds customers to move home and take their negative equity with them. For example, if a customer has a mortgage of £150,000 and a property worth £140,000, they would have an LTV of 107%.
Customers in this situation would be able to move to a new home, also worth £140,000, with their existing product rate, as the LTV would be maintained at 107%.
While this is likely to be a solution for people looking to move location rather than get more space, it is also possible for Lloyds borrowers to trade up - so long as they are able to raise a deposit.
For example, if a person has a mortgage of £130,000 and a property worth £110,000 (giving an LTV of 118%) but wants to buy a new property worth £120,000 they can do so provided they have a deposit of £10,000 – thereby keeping their mortgage at £130,000, and reducing their LTV to 108%.
“Borrowers will still be required to make an extra deposit rather than increasing their existing borrowing. However, the scheme will allow them to direct their savings towards the new property rather than plug the negative equity gap,” says Stephen Noakes, commercial director of mortgages at Lloyds.
Nationwide also allows borrowers to move mortgages and take their negative equity with them. Subject to normal affordability and other underwriting rules, existing mortgage borrowers can borrow 95% of the purchase price of a new property and move up to £30,000 of negative equity, subject to negative equity not exceeding 30% of the value of the new property.
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For those buyers who are not in negative equity but who are still struggling to remortgage, the following 95% LTV deals are on offer.
|SHEPSHED BS||5.49%||Five years||£499|
|IPSWICH BS||5.75%||Two years||£549|
|NEWCASTLE BS||5.95%||To 31.3.14||£995|
|MANSFIELD BS||5.99%||Three years||£999|
Source: Moneyfacts.co.uk, 7 February 2012
“However, to do this requires a reasonable level of savings, or some other access to funds, as the buyer still needs to find 5% of the purchase price plus all the other costs of moving, of which stamp duty is likely to be the biggest,” explains Ray Boulger, senior technical director at mortgage advisers John Charcol. “The existing mortgage cannot be moved to the new property so if there are still early repayment charges in place these will still be charged.”
So, while the situation may seem desperate for would-be movers who find themselves trapped, the picture is not all bleak. Talk to your mortgage lender, find out your LTV and see if there is anything that can be done. And if not, start taking action to improve your own situation, whether that’s home improvements or squirreling away more money.
And you never know, there is always a chance the wider market will give you a helping hand, some experts are predicting house prices will rise in the not too distant future.
The Centre for Economics and Business Research, for example, predicts house prices could rise by as much as 14% over the next three years. Meanwhile, Rightmove has offered a more conservative prediction of rises of 2% in 2012. As the last few years have shown us, the market can change dramatically in a short space of time and the house price picture may look very different in a year or two.
A hugely unpopular tax paid on property and share purchases. Stamp duty on property is levied at 1% for purchases over £125,000 (£250,000 for first-time buyers) which then moves up at a tiered rate. For property between £125k and £250k you pay 1%, then 3% from £250k up to £500k and then 4% from £500k to £1m and then 5% for properties over £1m. But unlike income tax, which is “tiered” and different rates kick in at different levels, stamp duty is a “slab” tax where you pay the rate on the whole purchase price of the property. On shares, stamp duty is charged at a flat rate of 0.5% on all share purchases. Figures correct as of May 2011.
A catch-all phrase that can range from assessing the price of a property or vehicle before offering it for sale or the net worth of assets in an investment portfolio to the prices of shares on a stock exchange.
The circumstances in which a property is worth less than the outstanding mortgage debt secured on it. Although it traps householders in their properties, the Council of Mortgage Lenders (CML) says there is no causal link between negative equity and mortgage repayment problems. At the depth of the last housing market recession in 1993, the CML estimated 1.5 million UK households had negative equity but most homeowners sat tight, continued to pay their mortgages and eventually recovered their equity position.
A financial adviser who is not tied to any financial services company (such as a bank or insurance company) and is authorised by the Financial Services Authority (FSA). They can advise on financial products to suit your circumstances. All IFAs have to give consumers the choice of paying by fees or commission and have to explain which would best suit the customer in that particular instance. Also, if commission is paid either by the client or the financial service provider recommended by the IFA, the IFA must disclose what that commission is.
The Financial Services Authority is an independent non-governmental body, given a wide range of rule-making, investigatory and enforcement powers in order to meet its four statutory objectives: market confidence (maintaining confidence in the UK financial system), financial stability, consumer protection and the reduction of financial crime. The FSA receives no government funding and is funded entirely by the firms it regulates, but is accountable to the Treasury and, ultimately, parliament.
Everything you own: all your assets (property, cars, investments, savings, insurance payouts, artwork, furniture etc) minus any liabilities (debts, current bills, payments still owed on assets like cars and houses, credit card balances and other outstanding loans). When you’re alive this is called your wealth; when you’re dead, it becomes your estate.
Loan to value
The LTV shows how much of a property is being financed and is also a way to tell how much equity you have in a property. The higher the LTV ratio the greater the risk for the lender, so borrowers with small deposits or not much equity in the property will be charged higher interest rates than borrowers with large deposits. The LTV ratio is calculated by dividing the loan value by the property value and then multiplying by 100. For example, a £140,000 loan on a £200,000 property is a LTV of 70%.