Negative equity - practical advice please

brighteyes78

Dear all,

I wonder if you could offer me some advice on my mortgage situation please. There seem to be quite a few knowledgeable people on this site, as well as people who have been through a recession and negative equity before, so I’d be grateful if you’d bear with me through the following long post.

My boyfriend and I bought a house in July 2007 (the worst possible time, I know) without a deposit. I realize that 100% and 100%+ mortgages and all who sail in them are now practically demonised in the media and among ‘decent folk’, but while the debate about who is to blame will rage on for years, the fact is that this is our situation and now we must deal with it.

We borrowed £138k on a rate of 6.29% fixed for 5 years on a repayment basis (total mortgage length was 35 years) from Coventry Building Society. This constituted a 107% mortgage. We borrowed more than the house was worth in order to set up home and pay for some repairs. This loan was 2.8 times our combined salaries. We were not totally irresponsible, we made sure that we could meet the monthly repayments and by fixing for 5 years, ensured that this would remain so for the short term (barring redundancies, which thankfully at the moment don’t look likely). We bought a typical first-time-buyer, bottom of the market, 2 bed Victorian terrace. Our mortgage deal was made up of a 95% of the house value as mortgage and the rest on a secured loan.

Obviously, the very nature of a 100%+ mortgage means that you are in negative equity at the outset. Prices in our area have dropped as they have across the UK. Because we borrowed heavily in the fits place and depending on how profound the housing market crash, we will likely still be in negative equity, or I guess at best just breaking even, when our 5 year mortgage fix comes to an end in 2012. My first question is what will happen to us after that point? Am I right in thinking that there will be no mortgage products on offer for those in negative equity or with very high LTVs at that time, so our only option will be to drop onto our lender’s Standard Variable Rate, whatever that might be in 2012? At the moment this would be fine, as our monthly repayment would drop significantly due to interest rates being so low, but if interest rates shoot up, we’ll be in serious trouble.

My second question is around whether there is anything I can do to tackle this. I want to ensure that we are in the best possible position when the mortgage fix ends. To this end, we have started to make overpayments. We are allowed to overpay by 10% a year on the mortgage but have started this month to pay an extra £150, as this is all we can afford. I thought that this would be better than saving in a bank, as the interest rates are so poor at the moment that the extra money is more effectively used by chipping away at the mortgage.

Is there anything else sensible we could do?

Thanks for reading this far. I would really appreciate your thoughts. Unfortunately, I’m learning a little too late about how mortgages and money works, but this site helps enormously.

Brighteyes.

Lifeisbutadream

Personally I think that you are being very sensible by overpaying. 2012 is a way off yet and the market will have completely changed by then anyway, so you have no way of knowing what the interest rates will be then.

If I were you, I would carry on as you are, overpay as much as possible and hope for the best!

PasturesNew

You have 40 payments between now and when your 5-years is up.

You are overpaying at £150/month, which (lets ignore interest) will mean your mortgage is £6,000 less in 5 years.

Over the next 5 years, because you are on a repayment, your mortgage would have dropped to £131,600 http://www.tigertom.co.uk/ttcalc/mortgage.php?loan=138000&downpayment_percent=0&year=35&interest_rate=6.29&currency=%A3&amortization=on&periodicity=12&action=Calculate

So at that point your mortgage is more likely to be £125k.

Realistically all you can do is save/overpay as much as you can in the interim and see what the situation is like in 2012.

The only thing you could do further is to overpay more than £150/month.

Your takehome pay is over £3,000 per month between you, your mortgage is about £800/month so there's a lot of room there to cut back.

leftieM

I echo what the others have said. Overpay, overpay, overpay.

Wookster

Good advice so far.

My only addition would be to save 6 months of living costs for the both of you assuming that neither of you earn anything at all. Keep this seperate and untouched.

After you have this saved, pay down as fast as you can.

Cannon_Fodder

Assuming the two of you have dealt with the debts mentioned in your other post in April 2007, you should have spare money from not servicing that debt, that can go towards saving/overpaying...

Joint income around £50K - should be possible to save £500 a month. Even if only as a target that you miss every month...better to aim high, then if you fall short, its still a decent amount.

If already making £150 overpayment, the other £200 to £300+ per month will add up.

Do a SOA - go to the "Debt Free wannbee" and "Mortgage Free wannabee" forums and start to cut some expenditure.

In 40 months, you should be able to save £10K ready to be your next "deposit" - 95% mortgages may well be commonplace by then.

b0rker

We are in NE.

We have a JI of £45K.

Our mortgage is £700. We have no other debts.

We have agreed to save £1000 a month between us.

It can be done very easily.

In fact this month I saved £750 myself and made £250 on ebay selling things I never use so will be saving £1K alone with my partner saving £500.

sarah_elton

brighteyes78 wrote: »

My first question is what will happen to us after that point? Am I right in thinking that there will be no mortgage products on offer for those in negative equity or with very high LTVs at that time, so our only option will be to drop onto our lender’s Standard Variable Rate, whatever that might be in 2012?

With regard to this point:

If are you still in negative equity in 2012, and if lenders keep the tightened lending criteria currently in place, then you are correct - you will go onto the SVR.

I strongly doubt we'll see the return of high LTV mortgages at the levels they were previously at by 2012, so the thing to work on if you want to re-fix in 2012 is your LTV. As others have said, overpaying is the way to go! LTV is a function of your mortgage outstanding and your house value. You can't control the latter - though by 2012 I would hope the market would have bottomed and maybe started to rise a little again. Therefore, overpaying = lower mortgage outstanding = lower LTV = happy days.

My three year fix finished in January this year and I was in negative equity (also had a 100% mortgage) so went onto the SVR. My repayments dropped from £616 a month to £480. :rolleyes: I'm selling (should complete on the sale tomorrow) so won't actually get the benefit of this *sigh*. Instead I had to go into HSBC yesterday and transfer £12k to my solicitor to cover her bill, EA's bill and the negative equity.

I was chatting to the HSBC staff member who did the transfer for me. I said it was negative equity, hence the large transfer. He said he and his partner are currently buying but he's nervous about it. Apparently, his application for and HSBC graduate mortgage was turned down! I told him mine was an HSBC graduate mortgage, taken out in 2006, a 100% mortgage at 4.2 times my salary. He said they don't do that anymore...

Like you I was able to afford the repayments with no trouble and since I took the mortgage, job changes have meant it's only now 2.4 times my salary. The only mistake I made was never overpaying like you are, hence having to hand a huge lump over now I'm selling. :rolleyes:

brighteyes78

Thanks. My partner pays out £250 a month on a personal loan that will end the same time as the mortgage fix, so that limits his ability to overpay. All good advice though. I think we'll have to have a serious rethink and find things to cut down on / cut out in order to up the overpayment.

cupid_s

Maybe head over to the DFW board and post a SOA, or join a mortgage free group on here with the aim of overpaying a certain amount by a given date (2012 maybe).

I would echo b0rkers sentiments. We have a joint income slightly above yours and overpay by £1800 a month quite easily (saying that our mortgage is now only £197 a month due to us getting our 66.5k mortgage down to 22k in 2 years)

brighteyes78

forgive my ignorance, but what's a SOA?