House prices are likely to fall, which means buyers with high LTV mortgages could find themselves with assets worth less than they borrowed.
Buyers and sellers have rushed to transact since Britain’s housing markets have reopened. But analysts disagree on how much UK house prices will fall due to the coronavirus outbreak. Still, the consensus is that they will take a hit.
Many buyers are worried about getting into negative equity as soon as they have purchased their homes. This means that you own a property that is worth less than what you borrowed to pay for it. Buyers who have purchased with high loan-to-value mortgages are most at risk. If you have purchased just 5% of your property with cash, for example, you will quickly be in negative equity if house prices fall by 10.6% next year as forecast by the Centre for Economics and Business Research (CEBR).
But that would not mean that you have to immediately sell your house at a loss. Here, we look at your options, and what buyers can do to protect themselves.
What happens if you get into negative equity?
Nick Morrey, of John Charcol, an independent mortgage broker, said “The biggest misconception about negative equity is that people think they’re suddenly going to be repossessed. That couldn’t be further from the truth. If you are able to wait out the market until prices climb, you should be fine. Over every five-year period, prices have ended up higher, even if there is a crash in the middle” said Mr Morrey.
Some analysts are predicting a “V-shape” economic recovery after lockdown is lifted, and both Capital Economics and Knight Frank expect house prices to return to growth in 2021.
Tim Hyatt, of Knight Frank, said: “If you do get into negative equity, hold on.”
Most lenders have removed high loan-to-value mortgages for new purchases, said Mr Morrey, but it is still possible to find options for transfers, as these don’t require the lender to send a valuer to the property. If your mortgage deal is coming to an end, talk to your lender about what options you have for switching.
If you’re not able to transfer, you will be moved to a standard variable rate mortgage when your current deal ends. While the costs could be higher than what you were paying before, the difference will be mitigated by the fact that the Bank of England base rate is currently at a historic low of 0.1 %.
What if you have to move house?
If you’re in negative equity and you can’t sit tight, your situation is more problematic. You will need permission from your lender to sell if the sale price is likely to be less than the remaining value of the mortgage. And you will be personally responsible for making up the difference in value.
A better option is to contact your lender and ask for consent to let out the property, said Mr Morrey. In other words, you can become an accidental landlord.
Be wary that rental values are likely to take a hit, particularly with the expected influx of stock from the short-term lettings market with the collapse of the travel industry. But hopefully, the rental income can cover your mortgage payments and free up your disposable income so that you can rent elsewhere while you wait for property prices to recover.
Is now a good time to negotiate a deal?
Initially, when the market reopened, many buyers tried hard to renegotiate big discounts. With widespread headlines about falling house prices, “you’re likely to be able to make a cheeky offer,” said Mr Morrey. But most sellers are still able to dig their heels in, for now.
Camilla Dell, founder of the London buying agency Black Brick, said after a crisis “we will always see a bit of distressed selling. There will be some undoubtedly, but I think it will be few and far between.”
Mortgage holidays, which at the policy’s peak was protecting 1.9 million homeowners, and the furlough scheme have both been extended to the autumn. While these measures are in place, few sellers will be forced to take big price cuts. When they end, and as unemployment rises, things will change.
If you are trying to negotiate, “the key to success is understanding your seller” said Ms Dell. If you know why, or how urgently they need to sell, you have more bargaining power. You will also have an advantage if you “can demonstrate that you can move quicker, and anyone sitting on cash is in a great position”.
Which parts of the country will be safest to buy in?
Lockdown has changed buyer priorities. Property markets across the country are booming, but demand is currently highest in the places where homes are better value and have more outdoor space.
Long-term resilience will also be dependent on the local employment markets. According to analysis by the CEBR, 48% of the UK population works across the sectors most affected by the coronavirus lockdown: manufacturing, construction, retail, hospitality and other service sectors.
But their concentrations are highest in particular regions. In Yorkshire & the Humber and Northern Ireland, 60% and 59% of workers are in these industries respectively. Disruption to the job markets here is likely to have a bigger impact on the local housing markets, according to CEBR.
[Source: telegraph.co.uk/property, 4 August 2020]
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