Surviving negative equity

With homeowners up and down the UK facing negative equity following house price declines, if this downward trend continues throughout 2009, many more people could find themselves living in homes which are worth less than the amount owed on their mortgage. The good news is that there are several options available to households who find themselves facing negative equity...

With property prices declining at their fastest ever yearly rate - falling 17.7% since February last year according to Halifax - the UK's largest lender, homeowners are feeling increasingly concerned about the value of their property.

However, millions of homeowners need not feel so anxious about negative equity. As David Hollingworth of mortgage brokerage London & Country explained to the Times Online, those directly affected will be people who have to sell their property; those who are unable to afford their mortgage payments; and homeowners who need a new mortgage deal.

If you fall into one of these groups, the good news is that there are a number of options available to help you when facing negative equity.

Mortgage overpayments

Industry professionals advise homeowners who find that their property is worth less than their mortgage debt should try to make overpayments in order to cut their loan to value (LTV) ratio (i.e. the mortgage loan divided by the property value, e.g. £150k loan divided by £200k property value = 75%).

The majority of mortgage lenders permit monthly overpayments of up to 10%. Some lenders set a limit on the amount they allow borrowers to overpay, for example, Nationwide's cap on monthly mortgage overpayments is £500.

Households are also advised to make sure that their overpayments are paying off some of the capital owed rather than only going towards the interest on the mortgage.

Remortgaging

Multiple interest rate reductions by the Bank of England have resulted in some standard variable rate (SVR) mortgages reaching historically low levels, and when their current deal comes to an end, homeowners in negative equity will be inclined to revert to their lender's SVR which could save some borrowers a substantial amount of money.

However, mortgage broker Aaron Strutt of Chase De Vere Mortgage Management recommends that borrowers who can access a deal should think about locking in.

"Thousands are likely to be caught out if they are on a lender's SVR because, inevitably, rates will rise. If lenders get the opportunity to raise SVRs they will seize it," he said.

Add value to your home

Making straightforward home improvements, such as painting and redecorating, can help to reduce the impact of negative equity by increasing the sale price of your home. Tidying up your garden and clearing the junk out your house can also bump up the value of your property. However, DIY enthusiasts who are tempted to carry out large scale projects, such as property extensions, are advised to carefully consider whether the cost of undertaking such big improvements will be outweighed by the financial gains. According to Abbey, a home extension costs £33,800 on average, but adds only £13,568 to the value of a property.

Selling your property

Those who need to put their house on the market can find negative equity to be a significant issue because the sale can result in a mortgage shortfall. However, some lenders will permit borrowers to "port" their existing mortgage to a new house, for example, Halifax allow this, as long as additional borrowing is not required.

Moving out and letting your home to meet the mortgage payments may be another alternative, but make sure you talk to your mortgage lender first. If you are considering downsizing, again, the advice is to make sure you gain the go-ahead from your lender if you wish to sell your house.

One factor to be aware of is that if your home is repossessed because you are struggling to meet mortgage repayments, and the property is subsequently sold for less than the mortgage, then you will still be faced with the prospect of being chased for the outstanding debt.

Debt experts advise any households who are in negative equity and are no longer able to afford their monthly mortgage repayments, to seek help as soon as possible. When it comes to borrowers in negative equity, mortgage lenders may be prepared to extend the term of their deal or allow the borrower to change to interest-only payments to reduce their monthly costs. Borrowers are also advised to consult their local housing association or local authority housing department.

Source: Times Online | Last updated: 6th March 2009

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