Riding out the negative equity storm

Morgan Stanley recently delivered a grim warning that within the next 12 months UK house prices will fall by 15 per cent, and 1.2 million people will be pushed into negative equity as a result.

Many homeowners, particularly first time buyers, have borrowed 100% or more of their home’s value when taking out a mortgage over the past few years.  As property prices have started to show signs of a downturn as a result of the credit crunch, many homeowners are expected to find that their mortgage amount is suddenly greater than the value of their home. 

This is not going to affect the majority of homeowners in the long term.  Being in negative equity is not a problem of itself; the problem arises when homeowners look to sell or refinance.  With 1.4 million borrowers due to come to the end of their fixed-rate mortgages this year, many will find that they are unable to remortgage because 100% mortgages are now incredibly scarce as lenders look to minimise risky borrowing and boost profits.  This will leave them facing steep repayment increases as their mortgages revert to their lender’s standard variable interest rate, with no option to find a better interest rate elsewhere. 

If you have borrowed 100% or more of your property’s value and will come to the end of your fixed rate or discount rate period without having built up enough equity to remortgage for less than 95% of the property’s value, keep the following tips in mind:

• Prepare for higher repayments early on.  Look at your budget and minimise outgoings as much as possible.  Try to increase your income if possible. 

• Start saving on the side so that you have some reserves to draw on when your monthly repayments rise.  Consider an ISA to maximise interest rates on your savings.

• Use any overpayment facilities available to you during the fixed rate or discount rate introductory period.  If you are able to build up a reserve of overpayments you are often able to take a payment break later on, which may help when your repayments rise.

• If you want to sell your home, consider increasing the value of your home by renovating or extending.  Even if you don’t actually carry out the extensions yourself, going through the hassle of being granted the appropriate planning permission can add value to the property. 

• Ride it out – just keep paying your mortgage and wait for better times.  House prices are cyclical; the same thing happened in the early 1990s, followed by a massive boom.

• Your mortgage repayment is the most important bill you pay each month, even before credit cards and other loans.  If you are in difficulties with your finances, seek professional advice, but make your mortgage repayments your absolute priority.  Speak to your lender as soon as possible if you find you are unable to meet your repayments.

Please note: This website, and the articles and information within it are based on journalistic research. It does not and should not be construed to constitute financial advice. Any information should be considered in regard to specific circumstances. All tips are followed at your own risk and should be followed up with your own research.  For more please refer to our terms and conditions of use.