Negative equity …..What can be done?

by Mark Johnston

Massive drops in house prices now means that negative equity is a problem affecting hundreds and thousands of people, especially those who bought their homes at the peak of the property boom in 2006 to 2007.

When the credit crunch hit banks and building societies withdrew many of their mortgages and then introduced much tougher lending criteria and also required higher deposits.

However when the bank of England dropped its base rate to an historical low of just 0.5%, things slowly began to improve. However the current eurozone crisis now threatens to once again push up the cost of mortgages.

Therefore with so few people being granted home loans, it is deterring first time buyers and anyone wanting or needing to move, from the property market. This lack of buyers is in turn making it much harder for sellers and pushing down property prices.

Standard and Poor conducted a recent survey which suggested that 40% more home owners are in negative equity this year than at the end of last year.

If people plan to stay in their current homes for many years to come then negative equity should not be a problem however if they wish to move there are a few options open to them to help combat negative equity.

Firstly borrowers should try to overpay their mortgage; most mortgages allow this up to a certain limit. However the only down fall of overpaying is that borrowers can not get the money back once it is paid down on to the mortgage.

The other alternative is to save money in a high interest easy access account, but with this people should take care in not being tempted to dipping in to it.

Unless home owners absolutely need to move they should try to stay where they are and eventually house prices should start to rise. Although they may fall further before this and they could remain subdued for a long time.

Speaking to the current lender can also be a good idea, many lenders can be sympathetic. With some lenders such as Lloyds and Nationwide they will allow existing customers to take their mortgage debt to a new property even if they are in negative equity.

A highly controversial option and a last resort is extending and borrowing further funds on a personal loan. This however should only be considered if absolutely necessary, for example to gain another bedroom not just a slightly bigger kitchen and only if borrowers are certain they can afford to pay the loan.

Negative equity mortgages are slowly creeping in to the financial market to try and help families unable to sell their homes. However these deals are private and lenders certainly do not like to admit they are doing them.

With negative equity cases on the rise some experts believe that more people will become ‘accidental landlords’, meaning that they will end up renting out their property and in turn rent where they need to be. So what we will have is lots of home owners renting to each other rather than selling to each other.



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