What happens when my house is worth less than what I owe?

Pygmymonkey

People say that if house prices are going down then you have only lost money on it if/when you come to sell it.... Well what if you need to renegotiate a new mortgage deal (of which there aren't any good ones anymore)

My situation is this:

I have a 5 year fixed rate (5.57%). still got 4 years left on that deal. Mortgage was for £85K over 25 years. House value was £95K (10% deposit)

So after 5 years i will probably have paid off somewhere in the region of £7K (these are just approx so bare with me on this)
If however the forecast house price crash makes my house worth only £77K and i want to get a new mortgage deal it means i now don't have a depostit and will have problems getting a good deal (or getting anything at all!)
Slightly worse scenario is that my house is worth less than what I owe and i want a new mortgage deal, what are my options???

I have also worked out that slight overpayments now would drastically reduce the captial I owe, so at the end of 5 yeas i would be in a better situation to negotiate a better deal. Is this something people would advise???

Thanks for your advice in advance.

abouttimetoo

Hi, sorry, i don't feel best placed to advise you with your situation but I wanted to give you a bump and would also suggest you post on the Mortgage board as well.

With relation to just the overpaymen question - if you can afford it i would certainly do so, every little helps and as you have already estalished it can make a big difference to the amount you owe.

jonesMUFCforever

Overpaying is one solution - the other is if you can find a savings account where the net rate after tax is greater than 5.57% put all the spare cash you can afford in there.

This has 2 benefits - one it means that in an emergency you will have a fund to tie you over (overpaying means the money is gone) and secondly when it comes to the end of your mortgage deal you should have a lump sum meaning you will have more options at that time.

setmefree2

Pygmymonkey wrote: »

People say that if house prices are going down then you have only lost money on it if/when you come to sell it.... Well what if you need to renegotiate a new mortgage deal (of which there aren't any good ones anymore)

My situation is this:

I have a 5 year fixed rate (5.57%). still got 4 years left on that deal. Mortgage was for £85K over 25 years. House value was £95K (10% deposit)

So after 5 years i will probably have paid off somewhere in the region of £7K (these are just approx so bare with me on this)
If however the forecast house price crash makes my house worth only £77K and i want to get a new mortgage deal it means i now don't have a depostit and will have problems getting a good deal (or getting anything at all!)
Slightly worse scenario is that my house is worth less than what I owe and i want a new mortgage deal, what are my options???

I have also worked out that slight overpayments now would drastically reduce the captial I owe, so at the end of 5 yeas i would be in a better situation to negotiate a better deal. Is this something people would advise???

Thanks for your advice in advance.

Hi pygmymonkey,

As you still have 4 years to go I wouldn't worry too much. 4 years is a long time in the property market. If you can afford overpayments you should definitely do it, as you quite rightly point out a low LTV will always get you a better re mortgaging deal. The fees are also extremely high with High LTV mortgages at present. Remember that the REAL cost of your property is the Market Value that you pay PLUS the interest over the term of the loan, so the shorter the term the cheaper your house regardless of what you paid at the outset.

1)You need to find out if your mortgage allows overpayments - if so how much?
2) Do you have rainy day savings? Maybe you should start a Cash ISA instead of overpayments - can you get a rate better ISA savings rate than your mortgage rate (Go to the Savings board). Indeed, if you can beat your mortgage rate maybe you would make more from a cash ISA over 4 years - then pay off your mortgage in 4 years, before you can for a new deal. Again, this would depend on the terms of your mortgage.
3) Some times regular savers pay better than ISAs- even taking into account tax. Again you need to see Savings board.

It's hard to predict what the mortgage market will be like in 4 years. Having lived through the early 90's crash, I can tell you that we made nothing on our first property but on our second property we made a packet - but probably more importantly we ended up with a much nicer property than we ever could have dreamed off as a falling market benefits everyone moving up the ladder.

Hope that helps

SMF2

Pygmymonkey

Thanks everyone for your comments.
I do have rainy day savings (although i also have a dodgy boiler at the mo)
Think i'm gonna do an over payment thing (thinking of renting out and moving in with OH so will have loads of free cash to make overpayments).; I'll make sure i've got rainy day savings too.

Kinda half put this post out there to see if anyone else has thought about the implications of the potential dilema (and other people will be out of deals in the next year and 10-20% price drops have been forecast.

Thanks again

ailuro2

You don't have to remortgage when the deal comes to an end in 4 years time, you will just go onto their SVR (standard variable rate), which could be any amount - it's a whole 4 years away - who knows what interest rates will be at then? why pay high arrangement fees for a poor deal when it might be better to wait for a better deal. If the market is on the up again (it might be??) then you could wait 6 months or a year and grab a better deal once your LTV was better.

Lots of options. Overpaying or stashing extra money in an ISA is always a good idea!


If you decide to rent out, you will need to let your lender know you are renting it out, and you'll have to get that boiler fixed first too!

esbo

Pygmymonkey wrote: »

People say that if house prices are going down then you have only lost money on it if/when you come to sell it.... Well what if you need to renegotiate a new mortgage deal (of which there aren't any good ones anymore)

My situation is this:

I have a 5 year fixed rate (5.57%). still got 4 years left on that deal. Mortgage was for £85K over 25 years. House value was £95K (10% deposit)

So after 5 years i will probably have paid off somewhere in the region of £7K (these are just approx so bare with me on this)
If however the forecast house price crash makes my house worth only £77K and i want to get a new mortgage deal it means i now don't have a depostit and will have problems getting a good deal (or getting anything at all!)
Slightly worse scenario is that my house is worth less than what I owe and i want a new mortgage deal, what are my options???

I have also worked out that slight overpayments now would drastically reduce the captial I owe, so at the end of 5 yeas i would be in a better situation to negotiate a better deal. Is this something people would advise???

Thanks for your advice in advance.

Correct me if I am wrong (doesn't happen often,but it is possible ) but don't you simply move onto your current lenders standard variable rate, or you could take out a new fixed rate deal with your current lender?
I would add the fixed rate deals are not normally any better than their standard rate when you take into account, things like arrangement fees and compulsary over-priced insurance etc...), lenders are not in the habit of giving money away, but you might get a slight discount possibly as a first time buyer, but thats debatable due to the fees etc...
I might have mis-read it that you might have wanted to move house after 5 years but I don't think that is what you meant, if your did want to move thats a different kettle of fish.

setmefree2

esbo wrote: »

Correct me if I am wrong (doesn't happen often,but it is possible ) but don't you simply move onto your current lenders standard variable rate, or you could take out a new fixed rate deal with your current lender?
I would add the fixed rate deals are not normally any better than their standard rate when you take into account, things like arrangement fees and compulsary over-priced insurance etc...), lenders are not in the habit of giving money away, but you might get a slight discount possibly as a first time buyer, but thats debatable due to the fees etc...
I might have mis-read it that you might have wanted to move house after 5 years but I don't think that is what you meant, if your did want to move thats a different kettle of fish.

Hi It always used to be better to move to a cheaper rate than to go onto the SVR. However, i know fees have increased alot so not sure how this effects the maths. I would think you are still better to move than be on a SVR.

getmore4less

This has always been an issue with the term based deals what happens when the rate runs out, many forgot to check the follow on rate in case they cannot change lender.

Reduced income used to be the biggest risk, no -ve equity is a reakl risk again(some of us been there done that last time round)

Some lenders have follow on rates that are close to there normal trackers and these are always worth looking at.

Once into -ve equity you restrict yourself to your current lenders options many will allow a new deal without new valuations as long as you have kept a good payment record.

As has been pointed out you need to save to give you more options when the time comes, I would tend to save this money in good rate accounts/ISA rather than pay off the mortgage since if needed you can do this later but it is more difficult to get the money back.

Considering the size(small) of the loan fees will play an important part so consider longer term deals, if planning to move then getting the biggest portable loan you can and going interest only is a way to avoid future credit crunch issues and then saving up to make the move rather than remortgage.

sdooley

This is why the APR is important as well as the initial rate. HSBC has had consistently low APRs but historically fewer 'special offers'