Negative equity predictions wide of the mark

Recent news stories about 100% and 100% plus mortgages are missing the point when it comes to negative equity, says Your Mortgage magazine.

The value of a property (and the amount of equity owned by the borrower, versus the amount still owed to the lender) will only be important if the borrower wants or needs to sell their property or remortgage.

It is also important to remember that house price trends vary widely depending on where you live. Although prices are falling or slowing in the UK in general, that might not be the case in your street or local area. Get some estimates for the current value of your property from a number of local estate agents before worrying about negative equity.

For the small percentage of borrowers that are on such a deal, Pauline McCallion, editor of Your Mortgage, said: "If a borrower wishes to sell or remortgage, having a 100%/100% plus mortgage at the moment does not necessarily mean they will be in negative equity. If they took it out two or three years ago, such borrowers could have repaid enough to bring their loan-to-value (LTV) down to 95% or less over the time they have had their mortgage, in which case they should have no problem accessing a new mortgage deal."

Remortgaging

"If a borrower has not repaid enough to bring themselves to this level, the chances of getting a competitive deal from another lender are slim. The vast majority of mortgage lenders are currently asking for a 5% deposit or more - meaning remortgagors need to be at the 95% LTV level. However, there are still options for such borrowers. Many of the lenders that previously offered 100%/100% plus mortgages, such as Mortgage Express or Yorkshire Building Society, offer those coming to the end of these deals specially-designed maturity products, so it's always worth speaking to your lender before panicking if you are in this position.

"Those hoping to remortgage to a new lender may encounter problems, especially if they have a 100%/100% plus mortgage that comprises a secured loan (the mortgage) and an unsecured loan (such as, the Northern Rock Together mortgage). Moving the unsecured part of the loan could prove difficult, as criteria has tightened and rates have increased in this sector too, much as they have in the mortgage market.

But leaving it with your current lender could result in a rate of SVR plus 5% or even 8%, a massive shock to any household budget.

Selling

"If you have a 100%/100% plus mortgage and you wish to sell up, you will need to find out the current value of your property and work out how much equity you have. If you have not moved down below the 95% LTV mark, you may need to sit tight and remain in your home until the property market begins to stabilise and/or you have repaid more of the loan. Those in arrears may also encounter problems as they may be forced to sell and so could be left with a chunk of mortgage/unsecured loan that was not covered by the sale of their property.

"The small percentage of borrowers with a 100%/100% plus mortgage do need to consider their options very carefully in the current economic environment to ensure that they do not lose out financially. If you don't have to sell up, it might be best to stay put for the time being. If you need to remortgage in future months, try and pay as much of your mortgage off as possible now and aim to have at least 5% equity in your property. You should also speak to your lender about its maturity products and work out how much extra it would add to your repayments to revert to your lender's SVR.

"Panicking will do you no good at times like these. Work out your options, speak to your lender and even consider speaking to an independent financial adviser about what you can do."

For more information on this subject see the July 2008 issue of Your Mortgage magazine, available from 19 June.