Less than a year ago, it was all talk of bubbles in the UK housing market. But we all know that what goes up must come down, and the first signs that the market was losing steam came at the start of this year.
The market continues to look skittish, with the most recent figures from Nationwide indicating that annual growth in house prices slumped to a five-year low last month. The building society reported subdued levels of buyer enquiries, and said the supply of properties remains “more of a trickle than a torrent”.
But it’s London that has really felt the squeeze. In fact, rather than a slowdown, the capital saw house prices actually fall, down 1.9 per cent in the second quarter of this year – meaning the average cost of a London property is now £468,845.
This decline is perhaps unsurprising given the euphoria in London property prices over recent years. But it’s also symptomatic of people feeling the pinch, with many would-be homebuyers sitting tight as Brexit-linked uncertainty looms large.
Many first-time buyers will welcome price falls with open arms, helping them move closer to that distant dream of owning a home. But for existing home-owners, it can become a nightmare.
When house prices crash, it can lurch homeowners into something known as negative equity, when your home is worth less than the outstanding amount on your mortgage.
Let’s say you purchased a property for £350,000 with a mortgage of £320,000. If a crash in prices meant your property was only worth £300,000, you would be in negative equity, with a property value that is less than your £320,000 mortgage.
According to property expert Elliot Castle, negative equity is not a phrase many homebuyers will be aware of. And yet, it could soon become a common problem.
Castle, who is the founder of WeBuyAnyHome, warns that fear of a negative equity climate is increasing, particularly with the Brexit storm brewing over the UK.
Problems usually arise when people with negative equity try to move house. Selling a house in negative equity can be impossible for some, as few people have enough savings to pay the difference in price between the value of their home and the mortgage.
But it can also be a struggle for those wishing to remortgage, because a lender is unlikely to let a borrower who is in negative equity switch to a different mortgage deal.
If you find out you’re in negative equity, your options will vary depending on various factors, such as how much negative equity you have and the value of the property you want to buy.
Here are some tips on what do to.
Lending a hand
If you want to sell your home in negative equity, the first thing you should do is speak to your lender.
Hannah Maundrell, editor in chief at Money.co.uk, says your mortgage provider might let you transfer the shortfall to a new property, get alternative finance to cover the difference, or even rent out your home after you’ve moved.
It’s pretty unusual, but a small number of providers even offer special negative equity deals, which allow you to move house without paying off the shortfall on your mortgage (although these often come with extra charges).
“If you need to remortgage, get your lender to explain your options,” says Maundrell. “You may be offered a new mortgage deal, or rolled onto their standard variable rate. Either way, your repayments may rise, so you’ll need to adjust your budget accordingly.”
While there will be a limited number of deals, the personal finance expert says it’s worth speaking to your broker.
If you can afford it, the best option is to pay off your mortgage more quickly by tapping into capital. If you make extra repayments, you can chip away at the shortfall over a period of time.
“Mortgage rates are usually higher than savings (for which you also pay tax on interest), so reducing your mortgage with any money you have is a valid option,” says Castle.
However, bear in mind that most lenders have a limit on the amount you can pay off before incurring an early repayment charge.
While it’s not ideal and will be costly, Castle says one option is to buy yourself out of the property.
“If you are desperate to move, and the difference in value between your home and the outstanding mortgage isn’t sky high, you could consider clearing the shortfall with borrowed money,” he says.
If you don’t have the funds, you could consider taking out an unsecured loan – which obviously comes with its own risks, and would increase your total debt.
Castle also warns that an unsecured loan is likely to be more expensive than borrowing against your home.
Sit on it
Of course, these options only really apply if you want to move house or borrow against it. In fact, most people in negative equity will continue to live in their homes and pay off the mortgage, or wait for property prices to rise.
“If you don’t need to move, just keep making repayments on time and your bank won’t be too concerned,” says Maundrell. However, she also recommends that borrowers consider taking steps to minimise issues later down the line, such as making overpayments, or using savings to reduce the amount you owe.
“Sorting out a budget that accounts for increases in mortgage repayments is a good idea. Also look at cost-effective ways to add value to your property.”
High demand and short supply make it unlikely London will suffer a steep fall. So if you don’t have to move house yet, wait it out until prices rise again.
Source: City A.M.