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 :)

Thanks for taking the time for writing all these thoughts out!

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.

The 1.2k a month is kind of if the shit really hits the fan and we feel we HAVE to. 800 would still feel a bit like having to save up to buy a house again. 300-500 probably wouldn't really feel much pain at all.

I've emailed two brokers to see what currents rates are looking like, we can make a plan from there.

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.

For sure. One of the reasons for buying under our means rather than the full amounts lenders will give us is to be able to be mortgage free by the time the OH is allowed to retire. On his private pension, I think that's something like 58. I have no intention of a mortgage coming out of our pensions!

Trackers usually let you overpay whatever you want

I think we looked into trackers before and it didn't seem feasible or there just weren't many out there. Can't remember why.

Some allow 10% of current balance. Others allow 10% of the ORIGINAL amount borrowed.

Ooh, that's good to know, I thought it was just 10% of outstanding balance. I'll watch out for the difference, thanks.

Re: smaller house/bungalows

Yep, they're basically around 50% more expensive than houses; the idea is to downsize our square foot requirements, but somewhat future proof for old age (plus I get a lot of lower body pain). We'll see how it works out. So many of the bungalows out there are pretty unpleasant with gardens the size of postage stamps.

I would go for 10% deposit because that should open up your options a bit more re lenders and rates.

The number of lenders available to us mattered a great deal when we were looking at a 465k mortgage and every extra £30 seemed to count, but less so with these amounts we're now thinking of. That slush fund is our peace of mind in case of redundancy, neither of us are prepared to spend it to save something like 0.01% off a mortgage rate. There have been 50,000 redundancies in his industry this year (albeit, worldwide).

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.

Useful advice, thanks.

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.

I've noticed this! But thanks for the reminder.

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'm aware that this is going to sound ridiculous, but, I've read the terms. He's the sole worker, I've been ill for 7 years, that's not going to change. If he gets sick, his work will pay 85% of his salary even with chronic illness all the way to retirement age. If he dies, I currently get a lump sum payout of 434k from his place of work. It won't cover paying off the house, but it would be enough to sell and get a 1-2 bedroom garden flat. We have looked into redundancy insurance btw, but it's a con. They don't start paying out for 4 months, then they only pay for 12, and there's a list of excluded illnesses. It's just not worth it (hence the desire to keep the slush fund). If I die, he'll sell up and move abroad. Possibly not ever buy a place again, just work/travel and repeat.

Thanks once again for taking the time to write all the in depth advice you did. You are a good sort :)

I covered off why we won't do 10% on another post just now, Twiglet. It's basically redundancy protection.

I agree re: bungalows. The thing about them is that people will always age and people will always need them.

Finding a good one though? Well, that's a different story!

Most of them have far smaller garden plots than houses, lower ceilings that make them feel dingy, but what they do almost consistently seem to have over most houses we look at is really, really private gardens - mostly because they're surrounded by homes of the same height. That's very attractive to us. We live in a goldfish bowl at the moment and I absolutely hate it.

We bought our first house in 2007 and expected house prices were about to drop - what we figured was it wasn't going to get easier to borrow as mortgage lenders would tighten criteria and renting would ultimately work out more experience. We had a 10% deposit as a cushion. Picking somewhere we liked enough to stay for a long time to ride it out was really our priority.

What happened was pretty much that. It ended up just putting us into negative equity. We didn't know how long it would take for prices to recover, so yes the natural thing to do was to overpay. It ultimately wasn't going to do is any harm because it reduced the amount we'd pay over the course of the mortgage.

The first mortgage we had only allowed us to overpay 10% but when we came to renew we deliberately sought out an offset mortgage which is calculated from the balances on your mortgage account and linked offset savings account. In this way you can overpay more than the 10%. This worked well for us in the end and ultimately was better than going for a ten year fixed deal.

If your plan is to try and overpay as much as possible you want to be looking at offset mortgages first. Offset mortgages work particularly well if your mortgage rate is higher than your savings rate.

Worth looking at rather than just looking at standard fixed.

Also if you have it in an offset, if you need the money it's easier to get it out again because it's not gone directly into the mortgage. You need to be careful with the temptation of this, but from what you've said here in terms of how much you could over pay, if you are someone who doesn't just blow money and is good at the discipline of saving it sounds like it might be a good choice for your position.

I loved our offset and in ideal circumstances I think we'd look at one again if it were available to us (sadly when we bought our current place it wasn't possible with how much we were borrowing) as it definitely worked as an incentive for us NOT to spend wildly.

Do offset mortgages still exist? We used to have one with Virgin but they stopped it after a few years. It was dead handy while it lasted, though.

I think they must do cos I did check they were still out there before posting for a similar reason.

I don't think they are very widespread but then they weren't to begin with.

Worth looking around to see. They may be ever so slightly higher on the internet but if you plan to save and pay off quicker it can mitigate that anyway.

Thanks for the reminder re: offset. I can't remember why we ended up ruling them out last time, maybe it was because we were borrowing so much that they weren't even an option.

It does sound sensible. We are disciplined enough not to splurge.

I can't remember whether it was with offsets that the OH found out you don't get to take that money with you if you port the mortgage. Whatever it was, it got taken away and put into the house which took away your freedom of having that emergency fund if you needed to move home, and he wasn't happy at the prospect of that.

I can't remember what we did if I'm honest. I know we had to close the account but beyond that I'm not sure.

Negative equity can be a problem if your lender collapses, like Northern Rock in 2008. The debt on their books was sold off, including to banks no longer offering new deals. Anyone in NE couldn’t switch to another lender, and couldn’t get a new rate from the bank that bought the debt, leaving them on an SVR. That being said, I think rules have been brought in to help these ‘mortgage prisoners’. Nevertheless, maybe stick to one of the more mainstream lenders if you think NE is a risk, as they are presumably less likely to collapse these days.

YBS definitely still do offset mortgages btw.

I think it does tend to be building societies.

I had a look at YBS today. They still do them, but only at 90% or less LTV. That would eat up all our savings. I'll have a look at a few other building societies just to check, but Barclays didn't seem to want to do it higher than 85%.

That's quite terrifying. I do remember reading about mortgage prisoners. Thanks for the reminder and details of what actually happened.