One In Ten UK Homeowners Are In Negative Equity
Many consider their home as an investment and see the equity built over time as a contributor to pension or a more comfortable standard of living in retirement. Therefore, a fall in the value of property hits hard at our real wealth, albeit it deferred until we start to downsize and release equity in later life.
Property prices have shown a healthy rise over a large number of years. It has been one of the few investments that has shown appreciation over time compared to any other form of saving or investment. The recent boom in property prices during the late nineties and early naughties was fuelled by willing lenders and a plentiful supply of cash. Why not! Property prices were growing steadily and predictably so even a 100% mortgage loan would be covered by a house that would appreciate in value by 5% to 10% per annum.
The bubble burst. Of course it had to – or so say the economists. But that doesn't detract from the fact that it is most peoples major purchase in their lifetime and they see owning their home as an essential part of future financial planning. Alternative homes for spare cash have been lacklustre in their performance. Savings rates have been low (with the interest taxable) and stock markets unpredictable.
The desire to own has also been fuelled by the erosion of the pension provision. Final salary pension schemes have been binned as underlying returns from investments have been decimated. Longer life expectancy and the reduced pension expectation have led people to look at investing more in property. The ease of credit helped amateur investors get into the buy-to-let market where they hope to charge rents that pay mortgages and benefit from capital appreciation over time.
Then comes the recession – preceded by a full scale financial markets meltdown. This has dried up mortgage lending for all but the best credit quality customers.
Not everyone is affected by the drop in property prices to the same extent. Those who bought many years ago and have a small, or no, mortgage have merely seen a paper loss in capital value that will not be realised until they sell. Over the period from when the property was bought to when it will be sold, they should still see a capital gain – albeit not as large as when the market peaked in 2007.
The real challenge comes for those that have bought within the last five years with 90% plus mortgages. Here, with property prices falling on average by 30% over the past two years, it is possible that the house could be worth not only less than what was paid for it but less than the balance owed on the mortgage. This, effectively, becomes a trap since it is hard to move house with no equity to take forward as deposit on the next home. All well and good if the owners have a dependable source of income and are happy with the home. The mere fact that the homeowner may have negative equity is not a problem provided they don't have to crystallise the loss.
There are now estimated to be one in ten homeowners in a negative equity position. That is, the value of the home is less than would be required to pay off the outstanding mortgage. So what can be done and what options exist?
First, don't panic. Chances are that you can afford the mortgage payment since you agreed to it at the outset. If you have reduced income due to job loss or pay cuts then you must prioritise your spending and budget accordingly. If you are experiencing problems paying your mortgage then talk to your lender and try to agree a changed payment plan until you get your feet back on the ground.
Many mortgages are fixed rate, fixed term. There are a significant number of these low rate loans that mature this year and will revert to the lenders standard variable rate. This will lead to a considerable increase in monthly payments so you must take action now to try and remortgage at a lower rate or refix the mortgage so as to fix payments for the future. Even though you may be in negative equity, some lenders may still consider you a worthwhile prospect particularly if you have a good credit history.
Time is a great healer. If you can, stay put and wait for the markets to stabilise and property prices to increase. If you can, consider making mortgage overpayments to reduce the amount borrowed faster than the normal payments. Paying off a mortgage early can save many thousands in interest payments.