how can i get out of negative equity?

adrian_bond

Hi everyone,

Here’s my situation. Please help!

me (27) and the missus (23) bought our 1 bedroom flat in Norwich (a converted 1890`s end terrace cottage style house in Norwich city centre NR1 postcode) as first time buyers in April 2007 (six months before peak) for 103k (was valued before we lightly improved it at £105 (new decor, solid wood floor etc)). So now worth approx £90 - 95k I think from pants online estimates. bah!

However, we have a fixed rate mortgage that will see us through till April 2012 which has a fairly low-ish rate (5.5%) which we can easily afford (borrowed 97500k (95% LTV) so our payments are £606 a month. Our combined earnings at the time were 35k approx, with a 5k deposit, plus extra for solicitor’s fees and the like. We now earn more (38k approx), but can save and enjoy our money as we see fit on a monthly basis.

we had the opportunity to borrow 6 x our combined salary (210k!!!) at the time, but politely turned it down as after talking to various people about houses before looking to buy, that 3.5 x is really the highest you should ever go unless your a major risk taker (or bloody stupid!). I heeded this warning and didn’t want the existence whereby it was cold beans and arguments every night because of overspending and ridiculous mortgages. We knew the crash was coming, although like all people, didn’t know when as everyone has been saying it was coming for the last five years. We were absolutely against renting (believed the hype that you MUST own) as we wanted to live together where our money was being put (even if only slightly) to our long term benefit, not to a landlord. Rental experience at uni put me off for life!

We are very comfortable. We can go on holidays. Shop. Eat well and spend as we see fit (within reason because we are both very thrifty). Both own and drive practical but nice cars (diesel focus & 1.0 litre yaris, both paid for outright), and are doing okay. If something needs doing, breaks or needs replacing it is never a struggle to find what we want or how to pay for it (we still don’t even have a credit card!), provided its nothing major (I.e. wall falling over etc) which hasn’t happened yet. Fingers crossed. However, we want to move up the ladder in two to three years when our family inevitably will grow (hopefully) and we will need another bedroom!

im now in a position that my job security will either be good or bad come the end of march (survived redundancy in December but are now busier than ever before?!) as I can see how full my employers order book will be for the coming year, (I design bits for yachts and superyachts so been hit pretty hard by recession), so will know within reasonable doubt how secure my future at my current employer is by April.

I currently have £2000 saved, and should increase this to approx £3000 by the end of March (which will fill my ISA this year), which will form my emergency fund as it is very prudent to have one at the mo. In total we have about £5000 spread around and saved so should be able to fund any temporary job losses (for approx 3-4 months?). I have without any extra earning about £300 a month of spare cash earning me 0.01% interest with shatwest. I have also begun earning some extra cash on a Sunday cleaning which brings in another £240 a month which will also go towards any problem alleviation after this month.

This is where I would like some guidance on what to do. Should I…..

1. stick the money each month into paying of my mortgage early and try to alleviate the negative equity, so maybe we can sell and have an amount left when we want to move (if market has bottomed and started to regrow by then).

2. Save the money to generate as large a deposit as possible (looking to move up the ladder in approx 2 years or when it’s economically feasible (probably 10 years

3. Start a private pension (as my employer sucks and doesn’t contribute to the voluntary hole in the ground which is a weak stakeholder scheme). My IFA says it’s a great time to start a pension (incredibly under valued shares everywhere) and I have to agree for approx £200 a month!

4. Try to sell the place for as much as possible now and settle the remaining mortgage (due to negative equity) whilst renting and saving like mad for a deposit.

5. Overpaying by the full £300 a month, and any extra sticking into shares in the hope that I can turn a profit to help fund a deposit for the next move.

6. cry myself to sleep every night as we were sucked in like millions of others and cant see a way out and don’t know whether to sit tight and hope or bail and draw a line under the last two years.

If anyone has any suggestions, opinions or guidance on how best to get ourselves out of this mess then please share them. I consider myself financially responsible. But have had my confidence and sensibility knocked by the constant doom which is enveloping everything at the moment. Thanks everyone. :money:

Ingsy

I'm in a similar boat. Bought a 2 bed flat (a home, not an investement!) in early '05. Thought the wife & I would be in there 4 to 5 years before moving to somewhere bigger to start a family etc. Are probably in NE now, or certainly very close.

Our plan is to rebuild savings this year (got married last year and while we're not in debt from it, savings took a huge hit), and then overpay the mortgage like mad next year.

Interest rates are so low, saving seems pointless (once savings are at a comfortable level) and so overpaying seems the most sensible thing to do, in our situation.

penguine

Just a few thoughts to get you started. As your mortgage interest is 5.5% you're probably best off overpaying as much as you're allowed to, since savings rates are so low at the moment. This will make your money go further than if you put it into savings then paid off the NE in a few years' time when you sell up.

Although you're already thrifty, you can probably find relatively painless ways of saving even more per month by visiting the Mortgage Free Wannabe or Old Style boards on here. If you've got a long-term goal (moving into a larger home and starting a family) to motivate you, it makes saving even more worthwhile.

Falling property prices mean the gap between your next home and your current home is growing smaller, so it's not all bad news for you. And there's a possibility that eventually mortgages will become available that will enable you to take your NE with you when you purchase your next property (this happened towards the end of the last recession according to others who've posted on here).

And try not to watch the news too much! There's nothing you can do about the economy or the decision you made to buy your home, so you're better off not dwelling on it.

CPS

Hi there,

Im in a very similar position with about £30k savings however even thats isnt enough. Choose between selling the house and using the savings to pay off the Neg Equity and go and rent, however we decided did we really want out that much that we would write a cheque for £20-£30k? No.

So we have taken the place off the market, set up overpayments of £500 a month and then going to keep our savings when it comes to remortgage time to lower our LTV to get a decent fixed rate. Its then just a waiting game as to how low the market goes. We then have to make a bit of money on the place for a deposit or keep aggressively overpaying. Its sucks but its done now. Penguine is right though, eventually the houses we are looking at will collapse more and will become very affordable once we can get rid of our place for the right price.

Its a cse of hanging in there and hope the bottom comes sooner than people think and when the market does reach the bottom, your mortgage matches the value of your house so u can take advantage of a cheaper house up the ladder....

adrian_bond

thanks penguine,

thats some of the best and most comforting advise ive read for ages. cheers

Cannon_Fodder

OP,

Selling now may allow you to escape with a smallish NE to pay off.

But the state of the market is such that the best time has been missed. Hoping to benefit from a further drop in prices later, meanwhile having to pay rent when you have no substantial savings to earn interest, means the figures are likely to be close.

What would the same place rent for?
By the time you factor in moving costs, deposit, fees etc it will be marginal.


Get your £300 a month doing something more than 0.01% - there are plenty of options - http://www.moneysupermarket.com/savings/compareresults.aspx?enquiryId=8719657

Get the £5,000 that is spread around into the best place(s). Don't forget the wife's cash ISA (you just mention your own)

By the time that's sorted, April will be here and then you will know the worst, or not, jobwise.

Hoping the best occurs, you will then be well placed to build, build, build those savings...

£300 a month is £3,600 per year, over 3 years is over £10k + interest, plus the £5K you already have, plus the £3K you also mention, plus all that interest...just noticed the cleaning job, another £240 a month, is £2,800 a year, x3 is £8K+...

Its starting to add up into some serious leeway, despite the spectre of NE.

Overpaying may well be a good idea, should the job be secured. So check the small print on the mortgage for what you are allowed to do.

Although, its a judgement call as to whether to keep a bit more back in savings rather than overpaying, just in case next December is another iffy time for your job.

Having £20k to £30k in deposit should make a re-mortgage possible. Or at least help pay the extra, should you have to drop onto SVR for a while.