Mentally preparing myself for negative equity and 40% price drop due to Covid 19 recession. Could anyone share their experiences of negative equity

[Desiringonlychild]

DH and I bought a 2 bed London flat for £392k last September with a 15% deposit i.e. we owe the bank £330k. Technically we are planning for 1 child so we could theoretically ride this out and not stomach the house price crash.

We are on 5 year fixed term mortgage and we were planning to overpay £10k every year (that was our initial plan. Based on regular mortgage payments and (this is a big if) overpayments, we should have 40% equity by the time it comes to remortgage. But there is a high chance we wouldn't. Are there any issues with being in negative equity that I haven't thought of? Thanks

P.s. I love my flat and the area and it's so much easier for me and hubby to wfh from this flat than at his mum's place. So in a sense, I don't regret. Plus home owners get mortgage holidays unlike renter's who get 3 months notice for eviction and still have to pay back all that rent (unlike homeowners who can spread out the interest over the course of the term).

Negative equity should only be an issue if:
a) your income drops and you can no longer afford the mortgage payments; or
b) you need to sell and the value has dropped below the value of the mortgage.

If you don't need to sell and can afford the mortgage then you should be able to ride it out. But of course there are always reasons why people need to sell.

The thing about a crash in house prices like the one you are envisaging is that every house crashes. It's not like yours crashes but others don't.

Sorry, no experience but honestly, don't try to 'prepare yourself' too much, don't read anything into predictions about what will happen, no one knows. It sounds like you're pretty well set if you are able to overpay and are only planning on one child - you will have to cross the bridge of negative equity if you come to it. Good luck!

I have In all honesty if you’re on a 5 year fixed rate mortgage and your flat is big enough for you for that time period, I wouldn’t waste any mental energy worrying about it, and I say that as someone with experience of negativity equity.

I experienced negative equity back in the the late 80’s my house value dropped by 25% I found it incredibly stressful and it was mentally very hard seeing bigger, better houses in better locations for less money than the shoe box I had bought, and thinking if only I had waited the house I could have had....I was determined to move house though so I had no choice but to save up the 20% difference to pay the mortgage company back (I had put down a 5% deposit) back then lenders would not let you transfer the outstanding money owed onto a new mortgage, I had to pay the difference from what I sold the house for compared to the mortgage, I literally started again, it took me a few years to save that money up and I went without a lot in that time to achieve it. On the plus side the next house I bought was at rock bottom price and on that house I made a lot of money so it all came good in the end, but my experience with negative equity is one I would not wish on anyone I did not find it easy at all.

Good on you for planning!

One addition is that when it comes time to re-mortgage the LTV determines the rates you can get. This is where negative equity can be a trap - people are unable to get a decent mortgage deal due to a negative LTV. The only option left for them is to roll onto the SVR which is usually an expensive way of repaying, and if interest rates go up - monthly payments go up too. So a scary situation to be in. As you are fixed for 5 years you have some time.

Note that the other trap is the affordability calculation. If your earning is down (e.g. single salary due to baby) you may not qualify for a new mortgage deal - so again only option is to roll onto the expensive SVR.

So if you can overpay (or invest with a plan to pull the cash out in 4 years time) do so.

We bought our big family house right before the market crashed in 2007. There could not have been a worse time, and we were immediately in negative equity in an area that did not recover.

13 years on the house still isn't worth what we paid but base rate has been so low, we've never remortgated because the tracker default has been great,

It hasn't mattered because we have been happy to stay put. Once, we needed some work on the roof and I was not able to to borrow on the mortgage, but we got a low interest personal loan that turned out cheaper.

Its not worth worrying about it, you need a house, its not like you can sell it and live with out one?

40% drop is way way beyond any of the (trillion!) estimates I’ve read. Have you actually seen that anywhere or are you preparing? Genuinely interested. I think if it were to drop 40% half the country round be screwed.

As above these are estimates usually from self appointed experts, no one will know. You have a flat and area you are happy with that's a great thing try not to worry.

Really it will only affect you if you cannot afford the mortgage any more, and I'm speaking from experience. If your house price drops 50k (or more) but you can still afford the payments and you can still have a child there because you have enough room, then you don't have anything to worry about. You just sit tight

40% would be an extremely high drop, is that really likely?

We bought 4 weeks ago, but we are planning to stay here for 20 years, so hope that we can ride out whatever happens next...

I think it is. Considering that the banks have pulled high LTV mortgages; Barclays pulled new mortgages with less than 40% LTV. It's supposed to be temporary but why would they put them back on the market if the prices start dropping?

It's similar to the 1989 crisis rather than 2008 crisis, where there was QE and a lot of money printing. During that crisis, property prices dropped 40%>

But it's a moot point cos my deposit was only £70k. If banks stop giving out high LTV mortgages, I could only afford a £120k property. And I don't foresee a 2 bedroom flat in London zone 3 to be worth £120k.

Really don't know where you got the 40 %.

My dad is a property developer and he has bought our family house plus an office block with 11 offices and a restaurant at 60% off the original price. So it's not unthinkable and he told me to expect that..

And also in the 1980s it dropped 40%. This probably wouldn't be a v shaped crisis like the last one.

Try not to worry. We bought two years ago for 649 with a 500k mortgage. I suspect it's also going to go horribly wrong but it is what it is. Hopefully we can ride it out and it's sort of our forever home (although I want to be by the sea but that's not realistic really.)

I bought in London in 1989 in the late 80's on a very high LTV mortgage and I can categorically say that the drop was nothing like 40%. My 1 bed flat dropped by about 7%and I was in negative equity for about 5 years - with very high interest rates to deal with as well. For the most part it didn't bother me as we were very happy in the flat and the area. We eventually sold after 7 years for a small profit and went on to buy somewhere bigger. If your dad is really picking up properties at 60% off then he's certainly not buying them on the open market!

@Puppylucky I guess a lot of it also depends on area? My mother in law bought in 1980s at the height, a 1 bed flat in Hendon for 70k, she ended up selling in 1995 for 30-40k. But she had paid off the mortgage and she had family to help her with the deposit for the next house. Some areas are affected more, I hope that my flat is not as affected because it is in a good school catchment so families (esp the ones who can't afford private school anymore) would still want to move here.

And of course I think 40% is a worst case scenario. Not all properties would go down as much, particularly residential homes in desirable areas. My dad had access to more properties all those years ago as he had a lot of cash and bought doer uppers.

But I don't think it's going to be pretty. We are long overdue for a correction anyway. On the bright side, did we really want our properties to go up and up in value indefinitely, making it harder to upgrade or for our child/children to get on the property ladder?

So you just came on here to talk down the market rather than ask for advice?

If I had the power to talk down the market (assume you mean bring down prices), I would have done it last June when I was looking for properties. I think when I was looking no deal brexit was a distinct possibility.

No I am just trying to accept that house prices would come down so I am mentally prepared when it happens and also understand my situation better. It's all a learning experience!

you would be very lucky to get a drop of 10% in London.
people are talking about the BIG drop for the last 25 years, last one brexit, none happened.

My own flag dropped from £450k in 2016/17 to £392k in 2019. I know because the previous owner extended the lease in 2017 and the value of the flat with an extended lease is £450k. So it has already dropped 10%. And in a sense brexit wasn't as big because the GBP dropped and foreign buyers got an instant discount. But now foreign buyers are affected because the whole world is affected.

op talking about a drop of 40%, for a minute it sounded like tesco almost half price.
let's get real, we can entertain a drop and bouncing back to the current price within 2years!!, I'm not an expert..so make what you wish.

If your Dad is a property developer then he would surely be able to point you in the right direction.