Overpayments, buying up and negatives equity

TheWizard_2

Hello! Hoping that the wise old owls on here can shed some light on this for me, it's probably quite straightforward but one of those things that the more I think about it, the more complicated it seems!

My property was bought in 2007 for 155k, with 5% deposit .. So was mortgaged for 147k (ish). It is currently on the market for 130k with an outstanding mortgage balance of about 123k. I made c. 18k overpayments since 2007 which is now sitting as a reserved amount that I could access if I wish to. The 123k balance is currently on standard rate of 2.5%, and is 'portable' to a new property.

We have recently sold a second property that has generated 60k equity. We intend to buy up to a property of around 320k in value.

My lender is suggesting to draw back the 18k over payments to 'port' the largest possible amount to take advantage of the low 2.5% rate that it is on. This I understand. However, by doing so, as I see it I will be putting myself into negative equity.

We intend to use the 60k from the sale of the second property as a deposit on the new 320k purchase. So a total 'new' mortgage amount of 260k, which is no issue for our earnings to support.

I guess I cannot really work out if the 18k overpayment have disappeared, a casualty of the falling house prices, or if because we are trading up, with additional deposit being injected, that the money is still there to be drawn back?

Does this make sense to anyone? Would drawing it back cause issues regarding to the purchase of a new property? I sense I am missing something quite simple, but can't get my head round it!

Help!

Thrugelmir

TheWizard wrote: »

I guess I cannot really work out if the 18k overpayment have disappeared, a casualty of the falling house prices,

Falling house prices. Purchase price £155k , selling price £130k.

When you say overpayment. I assume your mortgage to be interest only. As if a repayment mortgage you would have repaid more capital.

After selling costs quite possible that you'll need to settle negative equity to discharge the mortgage. As the selling price may well be lower than £130k.

You've lost your "overpayments". I'm afraid to say.

Lenders aren't keen on porting low interest rate mortgages. So expect excuses to decline your application once it reaches the underwriters.

TheWizard_2

Hi, thanks for your reply. Mortgage was repayment, not interest-only. The initial rate was 6% fixed rate which reverted to 2.5 in September 2012, which probably accounts for the discrepancy.

We will be exploring the porting option director with the lender, twice now, it has been they who suggested the option of porting the existing mortgage, while taking out a new product on the remaining balance for the new buy ( less the new additional deposit).

Thrugelmir

TheWizard wrote: »

We will be exploring the porting option director with the lender, twice now, it has been they who suggested the option of porting the existing mortgage, while taking out a new product on the remaining balance for the new buy ( less the new additional deposit).

Front line staff are there to encourage applications for business. Underwriters are the ones that really matter, and may take a different stance. Depends what the current lending policy is.

kingstreet

Nationwide I guess? Doing a very good job of trying to make sure you maximise your good rate.

If you sell for £130k, you currently owe £123k, so there'd be £7k left over. They are suggesting you redraw the mortgage back to £141k, so to sell, you'd put £11k of your savings into the pot to repay the bigger mortgage.

Your new mortgage would then have that extra £18k on the BMR of 2.5%, instead of on one of the lender's new products, doubtless at a higher rate.

You end up with the same sized mortgage on the new property, but more of it on that nice 2.5%.

TheWizard_2

Hi Kingstreet, thanks for the feedback. Yes, its Nationwide. I like the principle of maximising the borrowing at the lower rate, but it would be balanced against a lower amount at a (probable) fixed rate new mortgage on the balance of the lending. I guess I'm still hazy about whether the 18k is truly 'accessible' to me. As I see it, there are two purchase models in front of me :

1. Sell at 130k, buy at 320k. 7k equity. 123k ported @2.5%, 53k new deposit (total 60k), balance of 137k at ~4% (new mortgage).

2. Draw back 18k, sell at 130k. 11k negative equity. 141k ported @ 2.5%, 60k new deposit, balance of 113k (????) at 4% (newmortgage).

Despite having a PhD, I'm really bad with maths. I reckon I must be taking the negative equity as positive equity, rather than debt. So if I understand you correctly, cost model 2 actually requires 11k cash injected in order to balance? I think what has got me is that in my mind I'm already 'borrowed' 141k, so the borrowoing requirement for a 320k purchase is 'only' 179k more.

Appreciate you bearing with me...!

Cheers

kingstreet

Whichever way you go, you'll still have the same sized mortgage after you move. It's just that more of it will be on 2.5%.

Thrugelmir

TheWizard wrote: »

1. Sell at 130k, buy at 320k. 7k equity. 123k ported @2.5%, 53k new deposit (total 60k), balance of 137k at ~4% (new mortgage).

2. Draw back 18k, sell at 130k. 11k negative equity. 141k ported @ 2.5%, 60k new deposit, balance of 113k (????) at 4% (newmortgage).

Don't forget the £10k or so in costs that the sale and purchase will incur.

TheWizard_2

Yes, not forgetting about costs - just ignored them for the purposes of the borrowing example.

Would the 18k be available to draw back as cash though? Or is there any requirement when selling a property for the proceeds to be sufficeint to clear the outstanding mortgage balance if trading up?

Thrugelmir

The outstanding mortgage will need to be settled when the house is sold. Any shortfall will need to be paid in cash.

kingstreet

TheWizard wrote: »

Yes, not forgetting about costs - just ignored them for the purposes of the borrowing example.

Would the 18k be available to draw back as cash though? Or is there any requirement when selling a property for the proceeds to be sufficeint to clear the outstanding mortgage balance if trading up?

If you redraw the £18k you add it to savings. At completion of the sale, you'll need to put £11k of that into the pot to repay the mortgage. You'll still have £7k left, the same £7k equity you currently have.

As I said, you'll still have the same sized mortgage after you move.