Does negative equity matter if you are not bothered about switching lender?

[KievLoverTwo]

I'm back on the fence of buy now/wait 2 years (there are irritations every single day with our rental/we're over 40 and fast losing patience).

Of course the right financial thing to do would be to wait, but it's testing our mental health every single day, and, frankly, I don't want to. I turn 48 this month and I'm so tired of living in homes where things don't work for me and I can't fix them. Both of us are almost permanently in a bad mood with the constant crap our house/area brings on a daily basis.

So, my latest thought is to considering vastly adjusting our 'needs' list to a much smaller house (probably a bungalow), 100-150k under what the bank offered us a few months ago (95% of 465k). I figure that as long as we're buying well under our means, we'll probably be okay if the home is in negative equity after a 5 year fix, as long as we can afford the lender's SVR (some of them are currently still under 7%). We would also almost certainly get a mortgage where we can choose to overpay as much as we like monthly instead of an annual max 10% lump sum.

But then, it occurred to me, most people who are in negative equity are in trouble if they a) want to move or b) can't afford their lender's SVR. But I don't actually know what happens when you come to the end of your fixed rate and just want another fixed rate from your current mortgage provider.

So, you're with them 5 years, say your house value drops 30k, and you want another 5 year fixed rate from the same lender. Do they send someone round to your house to value it and say 'sorry ma'am, your house is worth less now, it's our SVR or nothing'?

Because all the internet tells me is 'you could be in trouble if you want to switch deals.'

I guess it's partly moot if you've overpaid that 30k during those 5 years anyway, but I'm still curious to know the answer to the question.

Thanks all :)

How much is your deposit?

It would be a problem even staying with your current lender as when your current deal ends, you may find yourselve unable to access another deal with your current lender without a decent LTR. So you'd end up going onto their standard variable rate and it would be difficult to move to another lender if you're in negative equity. And they wouldn't need to send out a valuer as they'd do a desktop valuation.

Depends on when we buy and the value of the house really. I would probably prefer to stay with a 5% deposit to have a 15-20k slush fund in the bank, perhaps take out a 30 year instead of 25 year (which he can do) and focus more on overpaying rather than putting down a large deposit.

The difference in mortgage rates between 5-10% is so small these days that I'd rather have the peace of mind of having that nest egg to fall back on. E.g. we currently lease our car and it'd be nice to buy one (even if secondhand) in 3 years when that ends.

I know it financially makes more sense to put down 10% but that peace of mind also matters a lot.

If we bought a 300k house with a 5% deposit on a 25 year term, we could still afford overpayments of probably as much as 1.2k - 1.5k a month if we weren't having to save for other things (no kids!). So, there's a bit of peace of mind in that respect.

Okay good, thanks, this is what I was looking for.

It absolutely does make sense to overpay if anticipating it.

Or, we could just pay the SVR as long as we stay well within our means and can afford for the mortgage to go up a lot.

How comes you can predict your house is going to be in negative equity? That is a very bizarre way to view your house purchase

Mostly new builds might go straight into negative equity but not usually other homes ime

I've been in rentals for so long that I tend not to look at anywhere as a long term prospect and err on the side of caution in case we need to move again. I'm also a bit of a control freak when it comes to our finances. I like to work on worst case scenarios for all scenarios when it comes to money.

Plus, have you read the news lately? House prices are falling, the value of homes is lessening, there will be people in negative equity over the next few years.

If you're going to overpay then you're at least protecting yourself. I've been in negative equity before- in the early 90s and it wasn't so bad as banks were allowing 100% plus mortgages. Although that was before the banking crash of 2007/8.

Loads of homeowners will be in this position if there was a crash, some worse as not everyone would be over paying like you. I guess absolute worst case scenario might be banks calling in the loan, but I wouldn't have thought that was likely? And if that DID happen then I guess people would just go back to renting? I'd have thought it unlikely though as that would mean the whole debt based financial system would also fail, I'd have thought. And we'd all be pretty fucked in that scenario.

I agree with PP that you are looking at this rather negatively, like you are almost bound to be in negative equity 5 years down the line which is not the case. Still, I understand that you like to consider worst case scenarios, although if you are too risk averse you will never buy which brings its own risks.

You can protect yourself against negative equity to some degree by not overpaying, not buying a new build and buying the sort of property that will be appealing to other people in the future too - a nice property in the best area you can afford without overstretching yourself.

To answer your question, we have found that as we get within a few months of the end of a fixed rate deal, the lender writes asking if we want to take out another fixed rate deal (they tell you the options) or revert to their SVR. As long as you stay with the same lender, they do not value the property or do affordability checks on you.

I agree with PP that you are looking at this rather negatively, like you are almost bound to be in negative equity 5 years down the line which is not the case. Still, I understand that you like to consider worst case scenarios, although if you are too risk averse you will never buy which brings its own risks.

For sure. I had six months of my life as an adult where I had £1 a day to live off and it was grim. I guess that never really left me. It's not exactly rational with a six figure income, but the anxiety never really goes away, and it's hard to rationalise, it's far easier to plan for doom and if the sun shines, be happy with that.

You can protect yourself against negative equity to some degree by not overpaying, not buying a new build and buying the sort of property that will be appealing to other people in the future too - a nice property in the best area you can afford without overstretching yourself.

I figure we could put 800pm aside/overpay without really even noticing it; that's 48k over 5 years.

I've already ruled out new builds for exactly this sort of reason.

I've already ruled out several really nice properties on roads where most of the other houses sell at half the price for the reason you mention too. In all likelyhood, it'll probably be a 3 bedroom bungalow in a quiet cul-de-sac about a mile to three miles outside a town.

To answer your question, we have found that as we get within a few months of the end of a fixed rate deal, the lender writes asking if we want to take out another fixed rate deal (they tell you the options) or revert to their SVR. As long as you stay with the same lender, they do not value the property or do affordability checks on you.

That's interesting; does that still apply during times of market falls/crashes? They don't care what your house is worth as long as you want to stay with them (and have a decent-ish LTV, I assume)?

Maybe get out there, speak to a few estate agents, view some properties and see if there's anything you like that may accept a reduction?

A friend has just accepted an offer on his house for £15k less than what he bought it for 2 years ago. It was originally on for nearly £100k more that he paid, but he's had to repeatedly drop the price in order to get any interest at all, and then accept an offer even lower.

You won't know unless you look.

It sounds to me like you are putting a lot of things in place to make sure you will be ok 5 years in the future. I don't think buying sounds risky for you compared to most people - even compared to myself in the past. I've never overpaid until very recently, and always borrowed the maximum I could. You are being so sensible. And I agree that a 3 bed bungalow in a quiet cul de sac will have broad appeal when you do eventually come to sell. I'm a bit weird possibly (or maybe it's the one way I am sensible) but I have always thought about how hard it will be to sell a property even as I buy it. Buy with your head not just your heart. I've lost money on property in the past in a falling market but never that much because properties with broad appeal always hold their value better.

I don't think lenders do particularly care about what your house is worth once you have a mortgage with them, as long as you keep paying the agreed mortgage for the 25 years or whatever. Obviously if you can afford to overpay then the term will come right down anyway. I wouldn't personally take out a mortgage for more than 25 years unless you really have to which you don't.

I would get a good mortgage broker (ones you don't have to pay can still access 90% or more of lenders so I wouldn't pay). They will be able to talk you through all the figures, you'll get it all in writing so you can make an intelligent choice that is also the right balance for you re risk. If you go on Money Saving Expert website they recommend some brokers. My daughter used L&C brokers last year and they got her a good 3 year fixed deal. She could have fixed for 5 years and as you can imagine she wishes she had now!

I’ve not RTFT but it does only matter if you want to change lenders. My flat has been in negative equity since Grenfell and we’ve been able to refix a rate with the same lender at the end of 3 fixes in that time.

We weren’t able to switch to a BTL mortgage with the same lender as when we tried to do that they sent a valuer out and we got a £0 value (so as negative equity as is possible), but still let us refix on a residential mortgage and granted us consent to let so we could still move out.

I read somewhere (but haven’t corroborated) that your bank have to let you refix and they can’t trap you on SVR just because of negative equity, and that stacks up with my bank experience so you might want to look that up.

We remortgaged this year, still in negative equity and just had to pay more to the lender to increase equity value before drawing down the new mortgage.

So in my experience unless you want to sell or change lender, it makes no difference at all.

This is really reassurring, thanks. I'm sorry that you found yourself in that situation but really glad you haven't had to suffer financially for it.

I thought I read somewhere that the cladding issue is being resolved now (finally). I hope that’s the case with your flat?

This is helpful, thank you. Because of our credit ratings we should still be able to get around 5.25-5.5% rates on a five year fix.

Thanks for reiterating the homes with broad appeal aspect. I'll keep that in mind when looking. If I had my choice I'd move to Arse End of Nowhere with no neighbours, but that's not practical when you need decent broadband nor if you want to sell in the future.

It will provide some reassurance to the other half that we won't necessarily have to be stuck on an SVR.

The other part of the reason for being so cautious is that, for years, he's wanted to start ploughing more money into pensions, and part of doing that means having an affordable home that doesn't suddenly become unaffordable. That will calm down his ever nagging anxiety about retirement funds for the future.

We used five brokers earlier in the year (purchase fell through) and L&C consistently came up with the best rates. None of the smaller brokers could match them.

I'm not keen on a mortgage longer than 25 years either, so even if we decide to initially go for 30 years for the first fix, we'd probably lower it to a 20 year term for the second fix.

It is (or almost!). Banks are now willing to lend but property prices have take a huge hit (lost a third of value in 11 years).

If you're 48, do you really want a 30 year mortgage? Will a lender definitely give you one?

No, not at all. Probably what we would do is initially get a 30 year to keep payments down in the first five years but we could also massively overpay, likely to be at least 800 a month. Then when the five years ends, probably remortgage for 20 years or less.

In all likelihood, if we are massively buying under our means as is our intent, we will probably be in a position to fully pay the mortgage off within circa 15 years. The OH will probably get payrises up to 40k over the next five years (and already earns six figures).

I am being overly cautious because I have been worried about negative equity, but some of the replies here have reassured me.

But, fyi, a few months ago we were offered a 33 year mortgage based on the OH's income and age only (41). They will even lend until 95 and take it out of your pension if your pension is good enough these days. It's absolutely crazy, I never thought I would see the day when companies offered such long terms.

So: start with 30/25 year mortgage with a view to probably paying it off within 15.

That’s good & bad news @TeleTropes
Sorry that you got caught up in the cladding issues.

Just to add, since you're like me and worrying about worst case scenario, would you maybe be better looking at a 10 year fix?

It's obviously more of a gamble as who knows what future interest rates will be? But it might give you the peace of mind you're looking for. And obviously, I bet we all wish we'd taken a 10 year fix a few years ago! Just an idea anyway to throe
throw into the pot.

I am just going to address a few points randomly:

If, with current interest rates, you are still in a position to OVERPAY your mortgage by £800 per month (though you mentioned overpaying £1.2k) in an earlier post, then surely you must realise that you are in a great position.

It’s good that your OH is thinking about pensions. But bear in mind that, the older you get before buying, the higher the chance that you’ll be paying rent/mortgage from your pension.

You mentioned ensuring that you can overpay by more than 10%. Make sure you check terms carefully. Firstly, know the difference between SVR, Tracker and fixed rates. General rule is SVR will be highest rate. Depending on the market you want to constantly be choosing a tracker or a fixed rate. Trackers usually let you overpay whatever you want. Fixed rate overpayments vary - make sure you understand the terms of each deal you come across. Some allow 10% of current balance. Others allow 10% of the ORIGINAL amount borrowed.

With regards to making compromises re a smaller house - you say a bungalow. They are not necessarily a cheaper option, though could be a good idea if you are future-proofing and don’t plan to move again. Bungalows usually have a higher premium due to the amount of land that they occupy - the land a building is on is more “valuable” than the house that sits on it. Bungalows take up more floor space than, say, a 2up 2down.

Again, if the overpayment wriggle room you have stated is true, then you are in a better position than a lot of people. If you feel secure in your jobs/income then I’d probably be looking for the best 5 year fix you can find.

I would go for 10% deposit because that should open up your options a bit more re lenders and rates. It will reduce your slush fund, but you can build this up over the first year with what you have available for overpayments. Maybe split available money between overpayments and topping up slush fund. Use the five year fix to maximise your position when it comes to securing a new deal.

When it’s time for a new deal, check all options carefully. I’ve often had the option of shaving a fraction of a percentage off my monthly rate by going with a new lender. But it’s often not bern worth it - if you move to a new lender, you have to go through full financial checks and a valuation, etc. by staying with the same lender, I’ve had none of that hassle and I’ve often had no fee either, it’s taken max 10 minutes online to switch.

Also, remember that mortgage rates are offered in “bands” - up to 95% LTV, then 80% LTV and then 60% LTV or less. The lower your LTV the better, but once you go under 60% then you will generally be getting the best deals available - you don’t get extra brownie points after that band.

If you do decide to buy, it’s also worth you both looking at what happens if one of you becomes I’ll or dies. You need to put plans in place re wills/pensions/insurance etc. Bit morbid, but worth bearing in mind.

I agree with the above. Bungalows do tend to be more expensive but that’s no bad thing if the aim is to buy something that will have broad appeal. They are more expensive partly because they have always been popular with homebuyers compared to other properties. Often affording the opportunity to extend if required while also being future proof if people remain there into old age.

The fixed rates we’ve had have only allowed us to overpay by up to 10% of the current balance a year. To pay off more would be to incur penalties so definitely worth checking that if to substantially overpay is part of the plan. At a time of relatively high interest rates, I would prefer to put down a bigger deposit thus reducing monthly payments from the start & possibly securing a better rate. However, I’m less risk averse than @KievLoverTwo

It does matter yes, you will end up on the lenders standard variable rate which is always painfully high..

I don't think the OH will want to fix for 10 years. I don't think our finances will ever be so dire that we get locked into a far higher rate for so long (especially if buying under our means).

I definitely think we'll consider 10 years for the future if a) upsizing or b) rates get so low again that it seems financially sensible!

I seem to be getting about a 50/50 split of people saying it does matter/it doesn't. I'm confused.