How Negative Equity Reduces your Mortgage Options

As UK house prices remain in a state of decline, slump and stagnation it is inevitable that many homeowners are caught out with negative equity. This was an inevitable outcome for those who bought at the peak and were attracted by 100% mortgages, and failed to consider the importance of a deposit. 100% mortgages have now been withdrawn from the UK mortgage market after much criticism.

Those who opted for 100% or even 95% mortgages further compounded the risk in many cases by taking interest only products which do nothing to reduce the principal loan or build equity. It only takes a small dip in house prices for 100% mortgages to result in negative equity. Although not an immediate problem on paper the actual reality can be an inability to sell the property if necessary as the amount owed will be more than the proceeds of the property sale, leaving homeowners in debt.

First time buyers are often caught in this trap and it can mean that babies Johnny and Jenny are still sleeping in the parental bedroom when they are six if the buyers intended to trade up once children came along. It can mean turning down a preferred job if you can’t find a renter willing to pay enough rent to cover the mortgage when you can’t afford to sell.

Homeowners with negative equity would be well advised to tackle the situation by swapping to a capital repayment mortgage if currently have interest only. Those with capital repayment products should look to decrease their negative equity by overpaying as much as they can. However one very sensible option which is remortgaging to a lower interest rate deal is not an option for most as they will be excluded from the best deals.

Most of the excellent low rates which are currently becoming available from lenders such as HSBC, Santander and Ing Direct, call for a loan to value of 60%, 70% or 75%. The Principality Building Society does offer a fixed low rate with a lower ratio of 85% loan to value. Those with negative equity will simply not be able to access these deals and are thus penalised for borrowing too much in the first place.

Naturally those who did borrow 100% of the property value are perceived as a greater risk and more likely to fall into arrears and face repossession. Those who purchased without a deposit often borrowed to the brink of their financial capability, buying more house than they could realistically afford. No deposit equates to little wriggle room if finances fail to run smoothly.

House prices will inevitably rise in the long term which is why it is so important for those currently trapped in negative equity to pay more than they do. Over paying now will produce future equity and help to eradicate negative equity. Once the equity has grown borrowers will have more choices and not be relegated to paying higher interest rates.