Neg equity

Lifeisbutadream

I was out with my brother last night and he told me that they bought their house (2 years ago) for £120,000 - they got a mortgage for £140,000.

They obviously know that they are in negative equity, but I am not sure they know how serious the situation is.

When their fixed rate ends in 2 years, what is likely to happen? I think that the bank will ask for their money back but my Dad thinks they will be allowed to carry on paying it. My brother is completely oblivious.

VfM4meplse

I think your Dad is right.

There will be plenty of others in this situation, and I think the banks have behaved badly enough without making victims of this recession homeless en-masse. It would be a heartless (and ungrateful) govt to allow this to happen.

Lifeisbutadream

VfM4meplse wrote: »

I think your Dad is right.

There will be plenty of others in this situation, and I think the banks have behaved badly enough without making victims of this recession homeless en-masse. It would be a heartless (and ungrateful) govt to allow this to happen.

I hope so - they are not stupid, they know they are in neg and always have been, but can afford their payments and dont want to lose their house.

They are also quite niave (sp) but I am still really shocked that they got a mortgage higher than their house is worth!

blue_haddock

The will just switch onto the bank standard variable rate - which may even be slightly better than the fixed rate they were on now that rates have dropped significantly..

The only problem with being in negative equity is if you cant afford tha payment in which case they would still owe the bank money when they get repossesed . If they can afford the payments then just sit tight and ride out the storm.

Dan:_4

Lifeisbutadream wrote: »

I was out with my brother last night and he told me that they bought their house (2 years ago) for £120,000 - they got a mortgage for £140,000.

They obviously know that they are in negative equity, but I am not sure they know how serious the situation is.

When their fixed rate ends in 2 years, what is likely to happen? I think that the bank will ask for their money back but my Dad thinks they will be allowed to carry on paying it. My brother is completely oblivious.

The mortgage term is not just for the fixed period, but for the full [25] years. When the fixed introductory period ends, you will switch to the Standard Variable Rate for the remainder of the term.

Normally, you would look for another fixed rate deal to avoid the uncertainty of the SVR, but unfortunately this will not be possible while in Negative Equity.

As the poster above quite rightly pointed out, at the moment the SVR is likely to be a lower rate then your on currently. So it may be worthwhile to use this 'windfall' to make over payments on your mortgage, save in a separate account to help when rates go back up or use it to pay down any other unsecured debts you may have.

It's only really a serious problem if you have to move. If your okay for the next few years, hopefully it will be alright.

tomterm8

The biggest problem is that negative equity makes it impossible for you to switch mortgage providers (unless you can repay the neg part of the equity, plus around 25% of the property price which is the current LTV most banks seem to be offering). Which means that mortgage providers tend to charge you much more than the going rate once you convert to SVR.

ad44downey

Lifeisbutadream wrote: »

They obviously know that they are in negative equity,.

On the bright side, they're now eligible to join the Krusty and Phil Madoff club (along with a few million others).

Dan:_4

ad44downey wrote: »

On the bright side, they're now eligible to join the Krusty and Phil Madoff club (along with a few million others).

As usual, a helpful post Downey.

Anyway, at least they have their own home. How many Big Issues have you sold this week towards your deposit?

Lifeisbutadream

ad44downey wrote: »

On the bright side, they're now eligible to join the Krusty and Phil Madoff club (along with a few million others).

I dont think they bought a house because they watched a bit of telly :rolleyes:

ad9898_3

Lifeisbutadream wrote: »

I was out with my brother last night and he told me that they bought their house (2 years ago) for £120,000 - they got a mortgage for £140,000.

They obviously know that they are in negative equity, but I am not sure they know how serious the situation is.

When their fixed rate ends in 2 years, what is likely to happen? I think that the bank will ask for their money back but my Dad thinks they will be allowed to carry on paying it. My brother is completely oblivious.

As has been said, there is no issue here unless they can't meet their repayments or they wish to switch to another lender.

Just to edit .... some people believe the banks will use margin calls, which basically means the bank will write to you to ask for a hefty chunk of cash to keep the LTV in balance. This will never happen in my opinion.

whathavewedone

As others have said, all that will happen is that they will go on the SVR which means that they will be exposed when interest rates go up. If they have any spare cash they should be using the next two years to build up some savings which they might need to dip into if interest rates are very high for a while.

I think this would be a better option than overpaying their mortgage as it's highly unlikely that they will be able to save enough to get 25% positive equity by 2011. Also if interest rates are above 6% by then there probably won't be any good fixed deals anyway.

Our mortgage expires in 2011 (we are not in negative equity but could be by then, certainly the 25% deposit that we had in October will have significantly dwindled) and we have an emergency fund of circa 30k at the moment. Maybe have a chat with him and ask him how much he thinks they can save over the next 2 years. I think that's the only thing they can do to protect themselves as much as possible.