Negative equity and how to avoid it

Warnings that house prices are set to falter have left many homeowners fearing they could be plunged into an Eighties' style negative equity nightmare. Britain's biggest mortgage lender the Halifax, reported that house prices have fallen for the third consecutive month and a survey of consumer confidence from Nationwide shows the biggest monthly decline since the survey began in 2004.

These figures come along with a bleak warning from the Financial Services Authority that 1.4m homeowners will struggle to refinance their mortgages in 2008 because of the 'very real prospect' that the global credit crunch will worsen. Under the circumstances, the Bank of England's move to cut base rate is no surprise but also no real remedy.

The falls in house prices comes at a time when there is a serious slowdown in the number of new mortgages being approved and a declining number of sales going through estate agent offices. In November, 88,000 mortgage approvals were linked to house purchases, a figure down 32% on the same month last year. According to The Royal Institution of Chartered Surveyors the number of new buyers signing up with estate agents has fallen for 11 months consecutively.

City analysts forecast that the property market could freeze over, with some predicting a crash that could slash 30% off prices over the next few years.

But while many economists forecast a slow-down in the property market they say a recession is unlikely. And with interest rates now on their way down and more cuts in the pipeline, we are unlikely to see a return to negative equity.

Moneyextra's mortgage calculators can help you work out what you can afford.

Martin Ellis, chief economist at the Halifax says higher borrowing costs and increased mortgage repayment costs were taking their toll. "The housing market has slowed in recent months as the increase in interest rates between July 2006 and July 2007 has taken effect," says Ellis.

"Higher mortgage repayments and falling real earnings have put pressure on households' income, resulting in a slowdown in both house price growth and activity.

"But the UK economy is in sound shape," adds Ellis. "Strong market fundamentals, a structural housing supply shortage and pent-up demand from a large number of potential first-time buyers will support house prices, preventing a sustained and significant fall."

Check our mortgage best buys now!

"It is clear that there are uncertainties in the market," says chief economist Fionnuala Earley at Nationwide, "Not least from the continuing turmoil in the UK's financial markets and the overall impact that this may have on the future performance of the UK economy.

"While we expect economic conditions to be more difficult for the housing market next year we do not expect a recession. With interest rates on the way down and the continued issue of undersupply of housing in the UK market, the underlying fundamentals are perhaps more positive than the recent swings in sentiment might suggest," adds Earley.

Avoid the negative equity trap

Negative equity is when your outstanding mortgage is higher than the market value of your house. Each month you would be paying interest on a loan greater than the real value of your property. It is a problem because when you come to move house you could owe your lender thousands of pounds more than your home is worth.

Sure about your mortgage choices? If you're not and you need someone to talk to, why not call us for independent, unbiased mortgage advice.

Top tips to avoid negative equity

• Speak to your lender if you find yourself in negative equity. Some lenders have packages for existing borrowers but these are generally only available to those with unblemished payment records.
• Seek permission from your lender to rent out a room in your house. Some lenders add an extra percentage on to the mortgage interest rate for allowing you to do so. It is worth asking them to waive this if it will cause you financial difficulty.
• Bear in mind you will still be liable for the mortgage when your tenants depart and the rent you get may not cover the whole monthly mortgage payment. Also factor in the cost of repairs and maintenance to your property.
• You will need to get permission from your lender if you want to sell your property. If you fail to get your lenders agreement it could prevent a sale going through if the sale price will not cover the outstanding mortgage. You will need to prove to your lender that you have obtained the best possible price for the property. Point out it is in your lenders best interest for you to sell your own home because if it is sold by them, it would be likely to get a much lower price as the property would be empty and could fall into disrepair.
• Consider taking out a personal loan, savings or borrow money from a friend / relative to clear the shortfall.
• If you have an endowment mortgage you could check with an independent financial adviser to see if the value of the endowment could be offset against the negative equity.
• If you need move because you need more space, consider building a loft or extension instead. In this way you may be able to stay in your home until house prices improve. And the value added by the extension should exceed the cost of the work.

07 December 2007 © Moneyextra.com

back

Moneyextra.com recommends you should consider taking independent financial advice before acting on any article. Please contact us for help with your individual circumstances if any assistance is required.