Entries Tagged 'mortgages' ↓

In June of this year, the Bank of England estimated that 1.1 million homeowners were facing a situation of negative equity. – A situation where the outstanding mortgage is greater than the value of the house. So many face negative equity because of a rapid fall in house prices and the fact many mortgages were sold in the boom times with a low deposit ratio. The situation of negative equity is worse amongst sub prime mortgages, where 1 in 6 mortgages face negative equity. The Northern Rock has the largest % of customers with negative equity. According to Fitch 32% of mortgages in Northern Rock’s Granite account are in negative equity.

If you need to move but are stuck with negative equity what can you do?

What is Negative Equity?

Negative equity is the paper loss you may have on a property that was bought for one amount but is now worth less than you paid. If you have no mortgage the paper loss is stood by you when you sell.

If the property is mortgaged for more than the house is now worth then the negative equity trap is a concern to the mortgage company as the loss would mean the mortgage isn’t covered by the property value.

Example you pay £200,000 for a house 3 years ago and have a £180,000 mortgage. The property is now valued at £170,000 due to the slump in values. The value is down £30,000 and you have a loss of £20,000 and there is a further £10,000 negative equity between the mortgage value and the realisable value.

The Effect of Negative Equity

It is hard to move home when you have negative equity.

Usually the mortgage company won’t allow the house to be sold unless you have enough spare capital to make up the £10,000 shortfall (the difference between the selling price and the outstanding mortgage).

Crystallising negative equity can damage your credit score.

Negative Equity Mortgage

Coventry Building Society and Nationwide have created a ‘negative equity mortgage’ that allows existing customer to carry forward negative equity if they move house. Up to 25% of the old home value, same or lower total loan, and not trading up are restrictions from Coventry but the scheme seems to be a good one.

Other lenders should and probably will follow suit so it is worth asking your lender if you need to move.

Do not become trapped by negative equity. If you have no new capital to make up the shortfall you may be able to get a family member to guarantee the difference. It may be appropriate to take an unsecured loan to fund the gap but beware the rates charged. Failing all the routes you know pressurise you lender to follow the Coventry Building Society and allow you to carry part of the gap forward to your new property.

Related

Remortgaging with negative equity

Mortgage Equity withdrawal

Quoted 2 Year Fixed Rate Mortgage Rates

The fall in base interest rates to 0.5% has yet to be reflected in fixed rate mortgages. Despite continued base rates of 0.5%, commercial banks are already  raising their fixed rate mortgages.

Commercial banks have been claiming that the cost of borrowing is going up for them. However, looking at the three month libor (interbank rate) this is not the case. Libor rates have actually come down quite sharply.

3 Month Libor

Note 600 base points is the equivalent to 6.0%. Current Libor rates are just above 1%

Commercial banks may also argue, interest rates are likely to rise in the future. But, as we mentioned in latest interest rate predictions, the Bank of England feels interest rates will stay low for a considerable time.

Why are Fixed Rate Mortgage deals remaining High?

• Less competition in the banking sector following merger between HBOS and Lloyds
• Banks desperate to recoup losses from bad debts and tracker mortgages with 0%
• Stagnant Housing market, making banks less willing to lend mortgages except with good profit margin

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Given the very low interest rates, now is a good time to be making extra mortgage payments in order to pay off outstanding capital.

Especially, in the early years of a mortgages, the mortgage payments are mostly weighted towards  interest payments. Only a small % is dedicated to paying off the actual loan. This means that the overall cost of mortgage payments will be higher. If you can make extra payments, it is a good way to make use of the period of low interest rates and reduce the overall cost.

The CML suggest there is a variety of responses to the low interest rates. A significant group of homeowners are making extra payments, whilst others are struggling to meet mortgage payments due to problems such as rising unemployment.

Depending on your type of mortgage you can arrange to increase payments. With interest rates very low, paying off your mortgage is generally going to be a more attractive option than saving.

Also worth considering is an offset mortgage which automatically uses savings in your current account to reduce mortgage debt.

Related

• How To Pay off your mortgage early
• Should I make extra mortgage payments?

An interest only mortgage can save a significant sum for households. But, at the same time, he can leave a headache for dealing with the capital repayment.

The basic idea of an interest only mortgage is that you just pay interest payments and rather than making capital payments you find another investment method for repaying the outstanding debt.

In reality, people often switch to an interest only mortgage to provide a short term reduction in mortgage payments. In times of recession and economic hardship, the attraction of making the switch to an interest only mortgage increases.

For example, if you have a 30 year £150,000 mortgage with an interest rate of 6%.

Your normal capital+interest repayments will be: £908

If you switch to interest only, the repayments will fall to: £750

Interest only mortgages could be seen as a convenient way to save money, if you were experiencing a year of financial hardship (e.g. if your partner left work to study for a year). They can also be useful if you are anticipating higher incomes / wealth in the future.

The problem is that once you get used to the lower monthly repayments it can hard to go back to the higher payments.

In the current climate, the temptation to choose an interest only mortgages might be higher. But, with falling house prices it can be more problematic. Falling house prices increase negative equity and with interest only mortgages the negative equity will be greater.

Some mortgage lenders offer an ability to switch between interest only and repayment mortgages (though this has probably become less common since credit crunch).

See also: Other ways to deal with sruggling to pay mortgages

I notice that if you have a large deposit some banks like the Woolwich are offering very competitive fixed rate mortgages of under 3%. For a £170,000 mortgage over 30 years, this leaves mortgage payments of £722 for a standard repayment mortgage. The interest payments are only £425. If interest rates went back up to 6%, the monthly cost would rise to £1029.19.

Natwest offer a pretty good fixed rate mortgage of 3.49% for 2 years, with £800 set up fee. The deposit is 25% which will still be out of the reach of many first time buyers, but for those who have a deposit it represents a very good deal for 2 years.

The Alliance and Leicester also offer fixed rate deals of less than 4%, but, these fixed rate mortgages are requiring a deposit of 35%. A & L Fixed rates

Looking for fixed rate mortgage deals with low deposit, I was interested to see Northern Rock offering one of the best rates. Northern Rock offer a fixed rate mortgage of 6.79 for 2 years %, but only require a 15% deposit. Northern Rock mortgages

If you have a 20% deposit, First Direct offer a very good deal at just 2.89%

Is This A Good Time To Take a Fixed Rate Mortgage?

There are very good deals for people with substantial mortgages, but for people with deposits of just 10 – 15%, fixed rate deals are quite high.

Base rates are not going to fall anymore, and in the medium term could rise as the economy starts to recover.

If house prices stabilise and start to rise, mortgage rates on low deposit mortgages may improve, but, that prospect is still hard to see at moment.

The new reality of government owned banks is starting to affect the mortgage market.

On Nationalising Northern Rock, the government wanted Northern Rock to run down its mortgages and pay back the government loan as quickly as possible. However, with the mortgage market seemingly frozen ( In December only  31,000 new mortgages were approved (compared to an average of 104000 in 2007)) the government have asked Northern Rock to start lending more mortgages – £5bn this year and £9bn in 2010.

Some of the mortgages will be for 90% mortgages. i.e a deposit of just 10%. This may help increase competitiveness for those with a relatively small mortgages. Currently fixed rate mortgages on 90% mortgages are over 6% and are not very competitive. It is good news for first time buyers who struggle to save more than a 10% mortgage.

The government has promised that there will be no return to 100% mortgages, even though in a climate of falling prices, there are not lender who actually wants to give this kind of mortgage.

Whilst this might seem good news for a depressed housing market, it will be interesting to see how government intervention in the mortgage market continues in the long run. Many blame the US sub-prime mortgage crisis not just  on financial deregulation but also government initiatives to encourage Freddie Mac and Fannie Mae to extend mortgages across the whole population.

True the banks have failed to manage their mortgage accounts but will the government owned banks do any better? Let’s hope so. The new mortgages are said to be available in April of this year

Lloyds Banking Group, the owner of the UK’s biggest lender, Halifax, and Cheltenham & Gloucester,has stated that now could be the best time to get a fixed rate mortgage. They say that fixed rate mortgages are unlikely to go any further down.

The best rates on a  fixed rate mortgages are as low as 2.99%. This is for people with substantial deposit and perfect credit history. However, compared to the past 10 years, these rates are low. The average fixed rate for the past 10 years is 5.84%

Standard variable rates which offer the base rate plus 1% give an interest rate of 2%

There is a temptation to get a fixed rate of 3%, it offers a very good guaranteed interest rate for the next two years. However, the prospect for base rates still suggest they could fall further to 0%.

The difficult issue is knowing how long interest rates will stay so low – so close to 0%. For example, in Japan they had interest rates of 0% for many years.

If the bank pursued quantitative easing increasing money supply then we could get a return of inflation by 2010, this could lead to interest rates rising fairly significantly. But, given state of economy it is hard to imagine interest rates rising for the foreseeable future.

It is possible fixed rates could continue to fall over 2009. But, this could be an excellent year to get a 5 year or 10 year fixed rate mortgage

With interest rates at 3% (and expected to fall soon), you would expect a sharp uptake in the number of mortgages. However, mortgage lending conditions remain tight. This is because:

• Banks still reluctant to lend. The Libor interbank rate is nearly 1.5% above the Bank’s base rate (usually it is just marginally above the base rate). This Libor rate reflects the unwillingness of banks to lend.
• Falling House Prices and Negative Equity. This is probably biggest reason for continued decline in mortgage lending. Falling house prices mean banks want to protect themselves by demanding bigger deposits. But, falling house prices are a great disincentive for potential homeowners to buy.
• Banks have been removing mortgage products from the market. Any new tracker mortgages are coming at significantly above the base rate (rather than below it during the boom years)
• HBOS, Northern Rock and Bradford & Bingley have virtually left the mortgage market as they struggle to improve their balance sheets.

Is the Demand for Mortgages There?

• When HSBC went looking for business in the re-mortgage sector it found demand was greater than it could cope with. Therefore, it soon left.
• The one bank to actively increase its market share is Abbey, owned by the Spanish group Santander.
• After the interest rate cut, there was a marked increase in activity on mortgages.co.uk
• Some banks such as Barclays and HSBC have been reluctant to pass base rate cuts onto consumers.

Outlook for Mortgages

• The recession will cause rising unemployment. Some forecast unemployment could rise to just under 3 million by the end of 2009. As unemployment rises more will be forced to sell their house (whatever interest rates). This will keep house prices falling and as house prices falling, banks will continue to demand large deposits to protect against negative equity
• After the merger of Lloyds TSB and HBOS. It may enable HBOS to start lending more mortgages.
• Northern Rock is currently trying very hard to repay the government debt. But, the government may start to encourage it to be less aggressive in repossessing homes and encourage it to lend more new mortgages.

Readers Question: Can you explain who is the loser are and why others may gain when house prices fall?

Those Who Gain From Falling House Prices

First Time Buyers Trying to Get on the Property Ladder. House prices have fallen at least 15%. This means the average house is about £20,000 cheaper. This reduces their long term mortgage repayments and standards of living. (The problem is that although house prices have fallen, it has become more difficult to get a mortgage, but, this might change in future)

Homeowners Who Wish to Upsize. If you live in a modest two bedroom house in the north but wish to move to a 3 bedroom house in London, it is now easier. This is because a 20% fall in a £100,000 house means you receive £20,000 less. But, a £200,000 is now £40,000 cheaper. Therefore, the move is now £20,000 cheaper. This might benefit couples who have more children or need to move to London. (House price falls have been strongest in areas like London.

(Renters. If you rent, lower house prices could lead to lower rents. However, because no one wants to buy, demand for rented accommodation is strong, therefore rents are not falling, but increasing. However, if the fall in house prices was permanent, rents may follow house prices in the long run.)

Those Who Lose From Falling House Prices

People Who Bought a House at the peak. If you  bought a house in July 2007, you will have seen a big fall in the value of your house. This leaves you with negative equity (Home value less than the mortgage outstanding) This is particularly a problem for those forced to sell their house because of unemployment. It is even more of a problem for those who got 100% or 95% mortgages.

Those Who want to downsize. This is opposite to the argument for those who want to upsize.

Estate Agents. Lower House prices mean smaller commissions. Furthermore, housing transactions has slumped giving them two problems.

People Who Remortgaged to Buy 2nd Homes. Some people bought housing as an investment in the expectation of rising prices. They are now left with negative equity.

Reverse Mortgages. Some elderly people were relying on their house value to provide for their retirement through a reverse mortgages which unlocks the value of the house. There value is now less.

People Who Are Unaffected by Falling House prices

People who have no intention of selling. If you buy a house and have no intention of moving in the next few years, lower house prices don’t have much effect. Although house prices are lower,

Renters. Renters are mostly unaffected by falling house prices.

See also: effects of falling house prices

The Credit crunch has led to a raft of books on explaining why it occurred and how we can get out of the crisis. These are some of the best selling books. The only problem is that the crisis is developing so quickly, they can quickly become outdated. I’m sure 2009 will see even more come onto the market.

The Credit Crunch: Housing Bubbles, Globalisation and the Worldwide Economic Crisis
by Graham Turner – A Critique of the free market policies which created unsustainable booms.

The Crunch: The Scandal of Northern Rock and the Escalating Credit Crisis (Paperback)

The Credit Crisis by George Soros. – George Soros explains the 2008 credit crisis from his point of view.

Trillion Dollar Meltdown: Easy Money, High Rollers, and the Great Credit Crash by Charles R Morris

The Subprime Solution: How Today’s Global Financial Crisis Happened, and What to Do About It by R.Shiller

• Credit Crunch Explained