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Negative equity: how to protect yourself
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| Monopoly chance (c) PA |
Falling house prices might mean your mortgage is bigger than the value of your property. Find out what that means for recent buyers and those looking to sell
The credit squeeze is worsening. House prices have fallen 2.5% in the last month, according to the Halifax house price index, and surveyors are warning that the slowdown is the worst for 30 years.
For many homeowners the spectre of negative equity – when your home is worth less than the mortgage on it – is undoubtedly looming.
At the same time the number of lenders prepared to lend even 95% of the value of a home, let alone 100% or 110%, has dwindled to virtually nothing.
“These market conditions will make many worry that they’ll be trapped in negative equity,” says Louise Cuming, head of mortgage services at comparison site Moneysupermarket.com.
“Indeed, many who took 95% products two years ago and added the arrangement fee to their mortgage will in effect have borrowed as much as 97% against the value of their homes. They may now be vulnerable.”
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Protection from negative equity
Yet there are ways for concerned homeowners to help cushion themselves against the threat – real or otherwise – of negative equity.
Common advice is to overpay on the mortgage where possible to help reduce both the amount owed and the likelihood of negative equity. Yet most lenders won’t allow borrowers access to funds once they have been overpaid – and as a result borrowers whose financial situation worsens later could find themselves struggling.
Instead, putting money aside into a high-interest savings account such as an Isa can help borrowers to build a nest egg which can be used to reduce the mortgage when it comes up for renewal.
The second thing to do is to look at how you can cut costs and make money. Renting out a room can earn homeowners up to £4,250 a year tax-free. This can be used to overpay on the mortgage or save into that nest egg.
