Impact of Negative Equity

Crashy_Time

LdnFtB wrote: »

The Rightmove index tracks asking prices, not sale prices. In the area I'm looking the Land Registry has indicated annual falls in sales prices of 5% and the surrounding boroughs are now also starting to showing year on year falls. So negative equity is a very tangible and very real probability for me despite the optimism of vendors in other parts of the country.

So if we could keep the thread on track with what the implications of that will be when it happens I'd be much obliged.

The implications IMO will be that people in negative equity will just give up plans to move, or to move up "The Ladder", and will stay put and concentrate on paying down their mortgage, many will be stuck in unsuitable homes that would have been considered "Starter Homes" before the property bubble got out of hand, and some may have difficulty paying the loans back (especially London and S.E) if rates get too high for them. You have to weigh up what you think will happen to interest rates ( I think there will be attempts at small rises from the US, but that deterioration in the EZ will lead to debt default, return to old currencies and real moves higher for interest rates as credit risk starts to be priced properly) and decide if the property you are buying is one you would be happy to be "stuck" in for some years.

ReadingTim

Crashy_Time wrote: »

If negative equity comes because or rising interest rates and you can no longer afford to maintain your house loan you will still need to find somewhere else to live?

It doesn't matter if it's rent or a mortgage if you can't afford it - you're equally as homeless. If you can afford to meet the monthly payment, negative equity is irrelevant.

Crashy_Time

ReadingTim wrote: »

It doesn't matter if it's rent or a mortgage if you can't afford it - you're equally as homeless. If you can afford to meet the monthly payment, negative equity is irrelevant.

Rents are falling, mortgage interest rates have only one way to go....up.

ReadingTim

Crashy_Time wrote: »

Rents are falling, mortgage interest rates have only one way to go....up.

Which on a BTL mortgage will then get passed onto the tenant in the form of higher rent....

LdnFtB

Crashy_Time wrote: »

decide if the property you are buying is one you would be happy to be "stuck" in for some years.

We're aiming to buy something we'd be happy in for a decade, so would that mitigate circumstances more?

Crashy_Time

ReadingTim wrote: »

Which on a BTL mortgage will then get passed onto the tenant in the form of higher rent....

No, if this was true landlords would already be charging higher rent and paying down their BTL mortgages quicker.

Crashy_Time

LdnFtB wrote: »

We're aiming to buy something we'd be happy in for a decade, so would that mitigate circumstances more?

It would make your life more bearable, but you have to decide if you don`t mind over-paying and by how much, and how high rates could go before it gets uncomfortable.

ReadingTim

Crashy_Time wrote: »

No, if this was true landlords would already be charging higher rent and paying down their BTL mortgages quicker.

No, the repayments will be kept at the same relative level, so will rise when rates rise, but not before. Anyway, it isn't the landlord who is actually paying down the mortgage, it's the tenant.

Crashy_Time

ReadingTim wrote: »

No, the repayments will be kept at the same relative level, so will rise when rates rise, but not before. Anyway, it isn't the landlord who is actually paying down the mortgage, it's the tenant.

No, any landlord who could get higher rent now would be stupid not to take it and put it aside/invest it to offset future interest rate rises, or pay down their loan quicker meaning less of a debt burden when rates do rise. Rents are falling, and rents are dictated by wage levels and demand, nothing to do with the relative levels of the landlord`s debt re-payments.

bouicca21

Gosh, fascinating stuff. Rents are falling? Not in my part of London. Prices are falling? Well the market in my bit of London is stagnating a bit and its clear that people can once again offer under asking price without being laughed at.

But I think the answer to OP's question is that it all depends on how long you want to stay in a property. The market has seen mega rises followed by stabilisation at lower levels before, but the stabilisation (at least in areas that I am familiar with) has always been at a higher level than before the bubble. If you are looking long term, then you will ride out a temporary blip. You will almost certainly be paying less than it costs to rent.

More important are factors like interest rates and job security. I can't be the only person on this forum who once paid 15% and is astounded at rates that are actually lower than my parents paid in 1950. I have no idea what OP's job security is like, but jobs are easier to get in London than in many other parts of the country, so if needs must... Of course if there are spare rooms, there's always the possibility of a lodger, and maybe OP can expect career progression with attendant salary improvement.

If OP can afford a place he/she thinks is going to be OK for 7-10 years, preferably with a substantial deposit, then I'd go for it. There is never going to be a right time, but a roof over your head that you own (albeit with a mortgage) is always going to be better than being at the mercy of a landlord in a private rental.