Negative equity - should we sell?

ian1246

The way I see it, your in £30,000 debt at the moment (£125,000 Mortgage-£95,000 House Value). If you sell up, you solidify that debt and make it a certainty. Granted, from what your saying you'd then be able to rent and pay off that debt through a combination of Credit Card/Savings. You'd then have rent outgoings, of which 100% of it would be "going down the drain". The only possible "Upside" to this approach would be avoiding a possible further dip in the housing market, which could cause that £30,000 debt to grow even higher.

The alternative is you don't sell up and instead start throwing everything you have at the mortgage - £10,000 paid off immediately (£4,000 Kept in emergency reserve), with £20,000 left to go before you "break even" with the value. Add an additional £10,000 you need to get a 90% LTV (10% Deposit) and could hopefully then switch to a repayment mortgage, which will then reduce your monthly payments (lower interest rate), potentially substantially, whilst allowing you to continue to build up equity in the property.

However, you've suggested taking out a loan if you were to sell to pay off the £30,000 debt - why can't you do that if you were to stay? At 5.99% SVR on your mortgage, odds are you could find a loan which is substantially lower than that. Borrow £30,000 between you over 3-5years and use that to overpay the mortgage - even if you were paying 4% Interest on the loan (£1200 a year interest), that would be 1.99% Lower than your mortgage - saving you £597 a year in interest payment, whilst then potentially enabling you to move your remaining Interest only Mortgage balance onto a fixed deal at a 90% LTV rate, at a lower interest rate, saving you £1000's per year in interest payments on the entire remaining (£85,000) balance.

Most loans also have the added advantage of being able to be overpaid without any extra fee/cost (check conditions before taking one out). That means with your £1,200 a month you can currently overpay, a large chunk of this would be tied up paying off the £30,000 loan - however with the rest you can overpay the loan to get it down much quicker. You may also have some additional £££'s left over from switching your interest only mortgage to a repayment mortgage, which you could use to overpay the mortgage or loan.

The other advantage by switching to a repayment mortgage is that you'll start to actually repay the mortgage & build equity, which will help you immensely in the future when it comes to moving to your 2nd larger home.

https://www.moneysavingexpert.com/loans/cheap-personal-loans/?p=0&msclkid=3c1425a83baf191f9f4d7808b44d3cd1#bestbuys

Tesco has a 2.9% Loan up to £25,000. Using their calculator - Monthly Repayments of £447.98 if the loan was taken out over 5 years.

£25,000 at your mortgage 5.99% SVR Interest is £1,497.50 a year - £124.79 a month. So effectively by taking out such a personal loan and reducing the mortgage amount, you'd be (£124.79 minus £447.98) £323.19 worse off from the loan repayment - but would have wiped out £25,000 off the mortgage, leaving you with only £15,000 left to find before you pay off the negative equity (£5000) & get a 10% Deposit/ 90% LTV required to switch to a decent Fixed Rate Mortgage, which would bring the mortgage interest payments back down to manageable levels. You have £14,000 in Personal savings - so you could use £10,000 of that and you'd only need to find another £5000 - something which you'd probably be able to save in a matter of months if at the moment you have £1200 to spare a month (Minus the £323.19 you'd be worse off by from taking out a personal loan). Once achieved, you take out a fixed rate Mortgage with a much lower interest on the remaining balance (£85,000).

Alternatively, you could play it safe and borrow a smaller amount and use that to pay some of the mortgage, yielding some immediate savings on the interest payment, whilst ensuring the personal loan is more "manageable". You then over pay the loan and once paid off, take out a new one, rinse & repeat - basically paying the negative equity off in bite-size chunks via loans (yielding immediate interest payment savings from the mortgage) , which you overpay each time. Again - once you ve got your mortgage amount down to £85,000, you should be able to re-mortgage onto a fixed repayment mortgage.

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Basically though, I think selling would be madness. You can comfortably (£1200 a month!) dig your way out of negative equity and build up to a 90% LTV rate to get a decent Fixed Rate Repayment Mortgage. After that, the only way is up.

Its also worth noting most mortgage companies allow you to overpay fixed mortgages up to a certain % (Normally 10%). Many also allow you to "port" your mortgage over to a new property in the event you move - so taking a fixed mortgage and then a few years later moving is not a problem - and at 90% LTV, you should be able to re-mortgage to a different company if your current provider does not offer fixed rates with portability.

You could even "future proof" yourself if your worried about your property value falling further and becoming a "mortgage prisoner" (negative equity when it comes to the end of your deal, forcing you back onto the SVR) - by just taking out a fixed deal over a longer period (Some companies offer fixed rates at 10 or 15 years) - by the end of which you'll have paid off a large chunk of the mortgage and have a good LTV for re-mortgaging purposes.

Not to mention, if the market rebounds - you benefit from that equity increase.

DannyGold

GDB2222 wrote: »

A lot of BTL landlords are selling up, because of political uncertainty. It doesn't seem a great plan to start letting out your house now.

It provides a home, even though you would prefer something bigger. Are you sure you cannot manage to stay there and start a family? If you do that, I'd use the savings to pay down the mortgage. It will save you £800 a year in interest, which is far more than the interest you are earning on your savings.

Otherwise, if you sell up now, you're going to be paying out rent on the larger place plus servicing the £16k loan, which is likely to be on quite a high interest rate. You need to do the math.

Bear in mind that the changes to the rental market may make it hard to find something to rent at all.

Sell up now before the rush to sell really begins

squeezywheezy

Thanks all.

phillw

My sister was in a similar position in the 90's with her husband, they got rid of their flat even though they were in negative equity and bought a house with a one hundred foot garden. The entire market was depressed and so they ultimately got a steal, the money they lost in negative equity is peanuts compared to what this house is worth now.

If you can afford to buy out of negative equity and get into your dream house now then I would be sorely tempted to, once you're out of negative equity then you may not be able to afford to.

The negative equity is a sunk cost. I'd probably rent it out or ditch it.