mortgage and downsizing?

k4j

Hi
I am very confused about this and hope some one can help me.
I am thinking of downsizing as I am going through a lot of financial problems and our income has decreased drastically. I bought my house in 2006 for £85,000. I think we paid just under £5,000 deposit. Unfortunately my house has not really increased in value. Now if I want to buy a house which is worth say about £50,000....can i transefer my mortgage? Or would I need to get a new mortgage? How would that work? I am sorry if it sounds dumb...I am really confused.
thanks in advance

notsodumbblonde

I would suggest you ask an estate agent for a free valuation of your home's worth first. You can ask more than one estate agent to do this,
and you can get a quote of their charges. You're under no obligation to sell , just get a valuation and a quote of their charges to sell your home. (You can also shop around for a quote for your solicitors fees).


But, in order to downsize, you need to first of all sell your current home. Usually when you do this, the mortgage for that address is paid up. In other words the money you borrowed is paid back to the mortgage provider once it's sold.

For example : You buy a property for £85K and it's still worth £85K today. You took out a mortgage of £80k on it on a repayment basis and have reduced the mortgage to £79K.

£85k - £79k = £ 6k equity*

You then use the £6k as a deposit to buy a new property, you would then take out a new mortgage on the new property.

The money left over after a property has been sold and the mortgage repaid is called equity*. Where a property has gone down in value and someone still owes more money than they did originally when they first bought it, this is called negative equity because it's a minus figure. eg worth £75k - bought originally for £79K = £-4k.

Of course you will also have other costs to pay such as Solicitors fees (to sell and to buy), Estate agents fees (to sell), removal costs ,etc.

A lot of people these days take out mortgages where you just pay the interest on the money borrowed. These mortgages are called Interest Only and are cheaper. This means that the debt - (money they owe on the mortgage) never goes down because they are only paying the interest on the mortgage. People do this to get on the property ladder or to buy a property they otherwise could not afford. This can sometimes be OK in the short -term.

Another type of mortgage is a repayment mortgage. This is better. These usually cost more because this pays the interest on the debt PLUS something off the debt every month and this goes to reducing the mortgage owed. So the mortgage debt goes down bit by bit until the end of the term. eg 25, 30 years when it's paid off completely.

I hope this helps.

k4j

notsodumbblonde wrote: »

I hope this helps.

Thank you so much for the quick reply and explaining everything so clearly.
I have only asked one estate agent to value my home, she said I would be lucky to get £80,000 for the house, but its very likely that i will get less then that. May be around 78,000. So that would mean i would be in negative equity.
I thought I could just change my mortgage to another which would be a lot less then my original mortgage. But I understand its not as easy as that.
I don't think any mortgage company would touch me now as I have many debts and our income as drastically changed. Also for about a year I was on interest only mortgage. I would imagine that would go against me as well and I will not be offered a new mortgage.

So I am stuck really.

notsodumbblonde

Also you could discuss this with your Mortgage provider. You may be better off rescheduling your mortgage rather than downsizing depending on your circumstances. This means you extend the period of the Mortgage and pay it back over a longer period thus reducing your repayments, but staying put. e.g. Instead of paying for 25 years... pay for 30 or 35 years if they will let you.

Before making a decision like this you will need to work out whether this would be a good idea or not. However, downsizing can be costly too, with solicitors fees, etc. The main thing is to stay calm, keep a cool head and work out what's best for you, given your financial circumstances.- Think long and hard about the options available to you, as any mortgage is a big financial commitment.
If you do have negative equity and your property is worth less than you paid for it originally then only move if you have no other choice as you'll have effectively made a loss. Whereas, if you're allowed to reschedule the mortgage, and you're sure you can afford the lower repayments and and stay where you are, eventually the property may go up in value anyway. That way you avoid all the costs involved with moving home.

k4j

Thank you so much, I never actually thought of extending the mortgage term....thats actually a great idea. Can they refuse for no reason?. Would we need to provide income details or anything like that? I have always been really honest with them from the beginning when I started to have financial difficulty but I have no outstanding debts with them so far. But I do feel like I will have arrears sooner then later if I don't do something now. I am going to phone them up first thing tomorrow and find out if i can do that, because that would actually solve my problem for the time being.

notsodumbblonde

I think it would depend on your mortgage product and the mortgage providers policy, No harm in making enquiries, nothing to lose. Ask to speak to someone who is CeMAp( Certificate in Mortgage Advice and Practice) qualified. However, find out what penalties you would incur if you did move home/mortgage provider. If you speak to them on the phone take notes, or if you make an appointment take someone with you so you're absolutely clear where you stand and haven't made wrongful assumptions. Moving can be very costly so you will need to cost it all out before making a decision. If you do decide to reschedule make sure you could still pay if the Mortgage rate goes up a little and check the new terms of the mortgage offered. Ask them for costings. Don't rush into anything without giving it a lot of thought. Sleep on it. Good luck

k4j

Thank you