How does decreased resedential value affect agreed loan?

carrspaints

Hi everyone,

I have what most would consider a dumb question but here goes...

My 2-year mortgage expired in March and I decided to go with a different mortage lender. As is standard pratice, I was asked to provide the value of my property ... at that time, it was 185k. However, I knew the value property market was about to head through tough times and asked how that would impact on how much I would end up paying for the next 2-year, tracker variable rate mortgage agreement. I was told it wouldn't make any difference????

I'm lost on this one. My house was valued at 185k in March. My equity was 92k, which means I had to take a loan for 93k. The thing is my house is now worth 165k. In otherwords, if I renewed my mortgage now with the house being valued at 165k, I'd only have to take a loan for 73k over 2 years. So how can my mortgage advisor say it doesn't make any difference? Am I just plain dumb or am I missing something here?

If my house is now worth 20k less than the value the lender had worked my mortgage requirement against, can I get them to re-asses the loan requirement? If not and prices continue to drop, surely it would be better to cancel the mortgage and pay the early repayment charges and then look for another mortgage where the value of my house and required loan are assessed at true and current values?

Sorry, I'm clueless when it comes to mortgages. Thanks.

Alligator1

Just to check I'm understanding right - you took at mortgage for £93k?

You have had this for 2 yrs?

Therefore, you will need a mortgage for £93k minus whatever you have paid off it in the last 2 yrs regardless of what the house is valued at.

Other than negative equity cases where the property is worth less than the mortgage it makes no real difference what the value of the property is.

If you borrow £93k then that is what you have to repay plus the interest. Once you have bought the property it doesn't matter if the value drops to £50k, you still have to repay the £93 you borrowed.

Does that answer your question? or have I just confused you more?!:D

_Andy_

I don't understand why you 'had' to take a mortgage out for 93k?

happybroker

did you actually switch your mortgage to another lender, if so you owe what you owe and the value of your house has nothing to do with it.

the equity is the difference between what you owe and the value of the house as such it is the equity that reduces and not the loan. It would be great if banks reduced our debt when the value fell but that doesn't happen so the cost of the debt won't change.

I think that is what your asking anyway

EdInvestor

Sounds a bit like the OP might have had one of those Islamic mortgages where supposedly the bank and the borrower 'share the gain and the pain'.

carrspaints

Hi. Thanks for the reply. Okay, I'll try and be more precise in my explanation. My previous 2-Year mortgage was with Natwest. In March, that expired. My mortgage consultant then found me a good deal with C&G.

Just prior to the this C&G mortgage being set up, my property was valued at 185k. My equity was 92k. So that meant I had to take a mortgage with C&G for 93k to meet the 185k assesed value of the property.

3 months later and the house is worth 20k less. Put another way, if I was applying for the mortgage now, the house would be valued at 165k. As my equity is 92k, I would only need to borrow 73k from C&G. That being the case, my monthly mortgage repayments would be much less, as I'm only paying back 73k, plus the C&G interest. My loan from C&G is based on my equity and what I need to borrow to meet the value of the property...so this is where I am confused....surely I am now paying more as the property is worth less?

carrspaints

AAAAAH, I think I get it now....in short, if property prices fall, it is my equity that takes the hit?

_Andy_

Sorry OP I'm still totally lost. Why would you 'have' to take 93k? Was that the balance of your previous mortgage with NW?

carrspaints

Hi, yes, 93k was the balance on my previous mortgage with NW

happybroker

Sorry but you've got the equity and the mortgage mixed up. What the valuer estimates your property is worth makes no difference to how much your mortgage is or would need to be.

If you appliied for your mortgage now, assuming you applied for a mortgage of £93k, your equity would reduce to £72k not the loan.

The loan is not variable based on valuations, the equity is.

This just means you are £20k less rich as your asset, the house, has reduced in value.

carrspaints

My redeemed mortgage with NW was £94404.00. I had to pay them £1404.00, as my C&G loan was for 93k. My initial loan amount was £91250.00, when the property was valued at 175k. Hope that makes sense.