Remortgaging: What happens if House prices Fall?

In the UK, the majority of homeowners have benefitted from significant house price rises. For example, the average house price has more than doubled in the past 5 years. (why house prices have increased so much) This means that many homeowners have the option to remortgage and gain greater equity withdrawal. This means they will gain a bigger mortgage against the value of their house price.

However, some are concerned that UK house prices could fall soon. This is because they are overvalued. Why House Prices may fall soon

If house prices fall, it could mean that those who remortgage are more susceptible to negative equity. Negative equity means that the value of the house is worth less than the mortgage. The real concern over this is that if you had to sell the house, you would still owe money on your mortgage. This might be a reason to delay remortgaging. However it is worth considering these factors:

Why House Price Fall is not a Bad Thing

1. If you remortgage your house to 90% of its present value, house prices would have to fall by 10% to create negative equity. Therefore, when remortgaging it is worth leaving a safety net of 5-10% to insulate against the prospect of negative equity.

2. If you have debts on higher interest payments it is better to pay off the debts remortgaging, rather than continue to pay the high interest rates.

3. If house prices do fall it may enable the MPC to reduce interest rates. This is because if house prices fall it will reduce growth and inflationary pressures. Therefore, the MPC will be able to cut interest rates. This will reduce monthly mortgage payments and make it easier to pay back. Falling house prices are only a problem if you have to sell your house. Also, it is worth remembering if house prices do fall, it will be cheaper to buy a new one.

4. The real problem for remortgaging is if interest rates increase significantly. This is because a higher mortgage leads to higher interest payments. If this is a concern you could get a fixed rate remortgage to insure against rising interest rates. – Interest rates will rise if growth and inflation are high.

Overall, the fear of falling house prices is not a reason to avoid remortgaging. Also, it is worth remembering that many house price experts have predicting the imminent collapse of the housing market for the past 5 years.