Sidestep pricey mortgages for the cost of a daily cappuccino

As house prices continue to decline, many homeowners could face more than paper-losses on their properties. Falling house prices means that even diligent mortgage payers may not meet their lenders' stringent requirements when their current deals end.

Money website Fool.co.uk therefore urges homeowners to take immediate action as lenders continue to restrict their best loans to borrowers whose mortgages are small compared to the value of their properties.

The cut-off point is typically a Loan-to-Value (LTV) of 90%. In other words, if you are borrowing more than 90% of the value of a property, then you are forced to go on to Standard Variable Rate mortgages.

What a fall in house prices mean

If house prices remain flat, homeowners that started with 100% mortgages will reduce their loans to 90% of the property value after five years. On a typical £200,000 mortgage at 5.5%, the loan will shrink to £178,543 after 60 monthly payments of £1,228.
But if property prices fall 5%, the outstanding loans will still be 93% of the value of the home after five years, which is above the 90% threshold for better mortgage deals. That's because even though you have been paying off the loan steadily, the value of the property has dropped to £190,000. It will take seven years to reduce the loan to 90% of the property value.

If house prices fall 10%, it will take eight years to reach 90% LTV, and 11 years if property values slump 20%.

How to put yourself in control

A 5% drop in house prices means homeowners must cut the outstanding loan to £171,000 within five years to comply with the 90% LTV criteria. Overpaying by £109 a month, or £3 a day, is all it takes to achieve this. If house prices fall 10%, they will need to overpay by £240 a month. But if property price fall 20%, they must overpay by £500 a month.

David Kuo, Head of Personal Finance at Fool.co.uk, say: "The toxic cocktail of easing property prices and tougher lending criteria means that homeowners must act now to avoid ugly mortgage deals when their current arrangements end.

"A modest fall in house prices means that small overpayments of £3 a day will be enough to reduce the loan-to value to 90%. This is equivalent to giving up a store-bought cappuccino every day.

"But if prices fall by as much as 20%, then extreme savings will be required. Extreme circumstances require extreme measures. So total up what you need to cover bare essentials, and cut out everything else.

"That's right. Extreme savings are required when times are hard. But hard times come and go. If your resolve weakens, just ask yourself if it's more relaxing paying to watch repeats on cable television or knowing that you can afford to pay your mortgage."