Negative equity - plan of action?

blueelephanttrunk

We own a property which is in negative equity and would like to move in the future, we're looking at our options and I wondered if you lovely people could give me some advice

Our house is a 2 bedroom terrace which we now owe £93,000 on the mortgage. Last year we had agents round who said we may get £89,000 if we were to sell the house. Our mortgage payments are £500 a month.

We were thinking of keeping the house as a rental property. There are 2 properties on out street the same as ours who are rental and have had steady tenants for the 5 years we have lived there. A rental agent has said we would be able to change £400 - £425 for our property.

We are wanting to move and buy another property around the £160k mark and currently have nothing saved (We were concentrating on paying our debts off and will be debt free in 2/3 months) Yippee!

I'm trying to work out a plan of action for when we are debt free. We will have £1000 a month spare. Firstly, do you think renting it out is a good idea? If so, would it be best to overpay our mortgage a bit before we start saving for a deposit? Or do you think we should just start to save a deposit for a new house? Or do you think we should just cut our losses and sell this property and not rent it out?

I forgot to say I have spoken with my mortgage provider who have said I can rent the house out on the same terms as the mortgage is now. NRAM together mortgage 4.73 %

Any advice at all would be super Thanks

AFK_Matrix

Ok I maybe just not reading right but if you have no deposit and are in negative equity then your not in any position to buy a place anyway. As you have no money for a deposit that will likely be at least a year of saving to get that deposit probably more like 2, even with having £1000 a month spare it's going to take you a while to save the deposit.

Thus I can't see the reasoning in renting the property out as I assume you will then have to go rent and the £400-425 you will get on renting your property out won't even cover the mortgage and I'd be amazed if you can get a decent 2 bed flat for £500 a month. Or are you going to be moving in with the parent's or something for a year or 2??

Sorry I may have miss read what you intend to do but I can't see why you would rent the place out? It's also all the responsibilities of renting you'll have to learn about and take on. For instance can you handle the tenant not paying or trashing the flat? And that's just a small look at all the responsibilities you'll have, have you looked on here about all that is involved in being a LL and all that can go wrong?

blueelephanttrunk

Hi, thanks for your response.

If we were to let the property out it would be after we have moved into the new property, we wouldn't rent anywhere ourselves.

I'm just trying to work out if it is a good idea to even consider renting it out or if we should just save enough to cover the negative equity and the deposit and sell it.

Hope I am making sense!

DVardysShadow

You would be barmy to rent the place out for 425 and pay 500 mortgage. By the time you factor in maintenance and voids, you would be paying out a net £250/month.

As for the negative equity and starting to save, if you will have £1000/month free, pay down the mortgage as much as you can. 4.73% is a better rate than any ordinary savings product, so beyond keeping money available to meet emergencies and abit to fund out of pocket expenses for buying a new house, anything you save towards the new property might as well all go into paying down the mortgage.

AFK_Matrix

Ahh ok I get it now I thought you were going to rent it out now and then save up and buy a place.

Personally if it was me I would save up the deposit and the negative equity amount and just sell the house. As renting out is a lot of responibility as I have said and can be very stressful if you get a bad tenant. Also you wouldn't be covering the rent if you go with £400-£425 so imo what's the point as you'll be loosing money as it were. And then what happens if the tenant stops paying, can you afford 2 mortgages?

That's just my opinion of course but I would read up extensively on the subject and see what is involved first. As you won't be moving for several years I wouldn't think if your saving £1000 a month.

kingstreet

Before you do anything else, ask your lender about its consent to let policy. If they won't give you permission, it's a non-starter.

They may wish to charge a fee, increase your mortgage rate, or both. This may also influence your decision.

Travelqueen

I agree with the above. Renting out a property is very stressful, especially if you try and manage it yourself, not to mention all the increased legal responsibilities such as securing bonds etc.
If you have paid your debts off and then have spare money you can throw at the mortgage I'd do that. If you can do that for 2 years it's essentially 'savings' anyway as you'd get that equity back when you sold, if there is any, and it should take you out of negative equity.
With any luck your houses fortunes might have improved over the next couple of years and you will be out of negative equity.
There is a calculator on here somewhere which shows you want effect overpayments can have on your mortgage, its quite inspiring to see how much a small difference can make.
Good luck
TQ

arbrighton

Echoing others. Pay off other debts then over pay mortgage into likely positive equity and start saving for a deposit.

blueelephanttrunk

Thanks for your responses, It's given me something to think about anyway! We were sure renting it out would be the best option as we thought we'd lose less in the long run but you've pointed out things to me that I'd not really thought of. Especially factoring in all costs only bringing in £250 a month ish, I don't think we'd want to be having to pay an extra £250 a month to top it up ourselves :S

arbrighton

If rent is less than minimum mortgage payment, never mind safety certificates, landlords insurance, voids, damages, I don't see how it could be the best option

19lottie82

It is more than likely that your lender will require 25% equity in your property before they will give consent to let. You don't have this. Equally likely is that they will charge you a large fee and / or a higher interest rate.

Then you will also need a minimum of a 16k deposit + circa £2k for legal fees to buy your new place.

Your only real options are

1) Pay off your debts

2) Over pay your mortgage until it is in the black.

3) Get saving for a your deposit.