Mortgages and house price drops- what happens?

Oliveroses

Hi, please forgive me if this question is very naive, which I expect it is. Recently I have become very interested in overpaying my mortgage. But I have realised that I will need to remortgage or arrange a product transfer in July 2019, so no idea what this will mean for interest rates etc. My question is, if for any reason, house prices fall, where does that leave lenders or mortgage payers in the event that the house becomes worth less than the outstanding mortgage? Or is that very unlikely? (I am quite early on in a 35 year mortgage). In any case what might it do to LTV? I’m just interested in hearing about how it works. Thanks!:)

amnblog

LTV is a measure by which Lenders price their products.

A sub 75% LTV Mortgage will be expected to be a lower risk than a sub 85% Mortgage so is priced lower.

Reducing your mortgage through repayment and fluctuations in your property value will affect LTV and therefore potentially rates available to you in 2019.

If the property value is assessed to drop lower than the outstanding mortgage, that is known as negative equity.

In periods where negative equity cases started to rise in the past, we have seen Lenders offer a new set of rate bandings to existing borrowers which include a +100% banding. This make sense for the Lender, as although dropping values will make Mortgages more expensive for borrowers, unnecessary hardship creates arrears which benefits no one.

enthusiasticsaver

As explained above the LTV usually determines the rate you will be offered on remortgage. The lower the LTV the better the rate. Overpaying your mortgage saves you interest and even if the property prices fall it will improve your LTV so no disadvantage to overpaying. If there is a property crash overpaying may keep you out of negative equity.

In previous crashes lenders had mixed responses to remortgaging when the mortgage is higher than property value. After the crash of 2007/8 many NR borrowers were stuck with an uncompetitive lender due to them giving 100% or sometimes more mortgages and the crash sending them into negative equity.

If you can afford to overpay then I would suggest you do it to decrease the term if nothing else but hopefully the side effect will be you get a better rate at remortgage.

Oliveroses

Thank you both so much, this is very helpful (and interesting!). I will definitely start to overpay. The overpayment calculators reveal astonishing results!

Sanne

Worth bearing in mind that you need to ask some lenders to remove the built up overpayment “buffer” if this can be used to underpay. Otherwise they will still include this potentially affecting your LTV. Not sure how common this is but it’s the case with our nationwide mortgage.

AnotherJoe

Oliveroses wrote: »

Thank you both so much, this is very helpful (and interesting!). I will definitely start to overpay. The overpayment calculators reveal astonishing results!

What they wont show you is what else you could do with that money, or account for your personal circumstances,for example if you are a high rate taxpayer, overpaying your mortgage instead of putting that into a mortgage is similar to setting fire to your money

ViolaLass

AnotherJoe wrote: »

What they wont show you is what else you could do with that money, or account for your personal circumstances,for example if you are a high rate taxpayer, overpaying your mortgage instead of putting that into a mortgage is similar to setting fire to your money

You meant 'pension' instead of the second 'mortgage', right?