Impact of Negative Equity

LdnFtB

Hi,

I searched the forum but couldn't see anything in the first few pages, so apologies if this has been asked recently.

Given the way the London property market in the area we'd like to buy is heading, it's highly likely that if I buy a flat now I'd be in negative equity pretty sharpish, and with everything else into the mix (interest rates, stagnant wages, HtB ending etc) it's probably not likely they'll rebound in the next few years.

I'm OK to go into this as buying a house for myself is a much about putting down roots as anything financial, but I'd like to go into it with my eyes wide open.

If I took out, say, a five year fix and in five years time the flat was worth less than the mortgage, what would the impact be?

Could I remortgage? Would I need to put more savings in as additional deposit/overpayments? Would I be moved to the svr without any say in the matter?

AdrianC

LdnFtB wrote: »

If I took out, say, a five year fix and in five years time the flat was worth less than the mortgage, what would the impact be?

Could I remortgage?

It all depends on the LtV at the time, and prevailing lending attitudes.

If you pay £500k, and have a £450k mortgage, that'd be 90% LtV. Assuming the lending attitudes are pretty much unchanged to now, then...
If the value falls to £450k, and your mortgage balance is still £450k, then that'd be 100% LtV, so more-or-less impossible to borrow.
If the LtV is 95% at the time of remortgage, then you may well be able to borrow - but it won't be cheap, and it won't be possible unless your history is squeeky-clean.

Would I be moved to the svr without any say in the matter?

If your fix expires, and you don't remortgage, then - yes - usually you'll go to SVR.

Pixie5740

Lenders usually offer existing customers retention products though so you wouldn't necessarily be stuck on the SVR.

AdrianC

I should, perhaps, have clarified that "negative equity" usually means more than 100% LtV by definition - so in the £500k purchase, £450k mortgage, the value would have dropped below the outstanding mortgage.

Some people use the term simply to mean that the value has dropped below the purchase price.

ReadingTim

Whilst no-one knows what a lender's SVR would be in 5 years time, you should probably calculate the extent to which repayments would be affordable if the rate of interest was (say) 1.5%-2% more than it currently is: if they'd be uncomfortably tight once the fixed rate period ends then you're probably overstretching yourself.

Assuming (within reason) you could manage on an SVR, then negative equity is only a problem when you come to sell the place - up until that point don't waste any time worrying about it.

Philuk

On the top of the difficulties to refinance your debt on favourable term, you also run the risk of being insolvent if unable to service the debt for any reason (unemployment being the most obvious).Or in other words, you may be losing the flat and be liable for the outstanding balance on your mortgage. I know I am stating the obvious, but why not rent and save yourself the equity loss like most prospective buyers do (volumes are record low)? I know the argument is that renting is wasted money but such is legal cost, stamp duty and interest payment. Rents are decreasing in London too.

ReadingTim

Philuk wrote: »

On the top of the difficulties to refinance your debt on favourable term, you also run the risk of being insolvent if unable to service the debt for any reason (unemployment being the most obvious).Or in other words, you may be losing the flat and be liable for the outstanding balance on your mortgage. I know I am stating the obvious, but why not rent and save yourself the equity loss like most prospective buyers do (volumes are record low)? I know the argument is that renting is wasted money but such is legal cost, stamp duty and interest payment. Rents are decreasing in London too.

Well, some people like not being asked to move out with a month's notice, might want to have a cat or a dog, put up shelves and/or pictures, or paint the walls a colour of their choosing....

LdnFtB

Thank-you for the advice about remortgaging, but also the additional risks posed by negative equity.

Philuk wrote: »

On the top of the difficulties to refinance your debt on favourable term, you also run the risk of being insolvent if unable to service the debt for any reason (unemployment being the most obvious).

Both my partner & I would loose our qualifications/professional accreditation if we were made bankrupt which would further hinder our ability to earn a living and get a mortgage again. Thank-you for the heads up.

Out,_Vile_Jelly

I think the stupid end of the London market is calming down, but decent properties in decent areas are unlikely to dramatically lose their value overnight. If you have a good sized property with good transport links in a respectable part of town there are always going to be people who want to live in it.

If you're looking at a "designer" new-build shoebox "luxury apartment" in an area that the agents describe as "vibrant" or "up and coming" then I would seriously reconsider.

Crashy_Time

ReadingTim wrote: »

Well, some people like not being asked to move out with a month's notice, might want to have a cat or a dog, put up shelves and/or pictures, or paint the walls a colour of their choosing....

As Brexit unfolds and younger people from the EZ tick the UK off their "Go To" list, getting a month`s notice will become a quaint historical practice :rotfl:You could probably hang on as long in rented if you dug your heels in legally as you could in a mortgaged house if you couldn`t pay your debt?

AdrianC

ReadingTim wrote: »

Well, some people like not being asked to move out with a month's notice, might want to have a cat or a dog, put up shelves and/or pictures, or paint the walls a colour of their choosing....

Two months is the legal requirement.

And a decent landlord won't have a great issue with any of those, providing basic assurances and standards are met on the tenant's behalf. Things they'd have no issue at all with if they actually owned the place...