bestloans.co.uk Articles

The slowdown in the housing market is continuing, due to the general slow down in the UK economy and the difficulty in being able to obtain a loan or mortgage to purchase a house. Prices fell once again in June, making nine consecutive months of reductions in values.

With further reductions looking very likely, home owners are starting to ask the inevitable question, am I going to be facing negative equity in my home? Negative equity is the situation where the amount of loan an individual has outstanding on their home exceeds the overall value of the property and was last seen in the property crash of the early nineties.

According to new research from GE Money, property prices would need to drop by twenty per cent before we see those individuals with home loans suffering negative equity. These figures apply to a person who bought a property last year and put down an average deposit, paying interest only on the mortgage, for someone on a repayment style loan, the drop would have to be even greater as they are reducing the balance of the debt all the time.

This is the most pessimistic outlook from the research. For borrowers who have owned their homes for longer, even if they took out large loans to finance the purchase, the situation is much stronger. This is largely due to the fact that property prices have increased dramatically over the years preceding the onset of the credit crunch. Even someone who bought their home four years ago and took out a 100% mortgage or home loan now has equity of 50%, meaning that their home would have to halve in value before they faced negative equity.

There are obviously regional variations within these figures, with those living in London in the strongest position requiring a drop of 73% (from purchasing in1995) before they face negative equity, but this is generally a refreshing piece of good news in the currently turbulent housing market and gives us all one less thing to have to panic about!

It seems that it’s not just younger people who are struggling with debts through loans and mortgages at the present time, but also many individuals who are nearing, or even in retirement are in a similar situation to the rest of the population of the UK.

According to a recent survey from Key Retirement solutions, a company specialising in equity release products, a third of people in the UK approaching, or in retirement, still have an outstanding mortgage or secured loan on their home, with a total debt of £207 billion. The survey, which was conducted on people aged 55 and over also showed that the average amount of debt for this age group has increased by 20 per cent on a year by year basis.

Although it might be expected that the average value of a loan would decrease as people got older, in actual fact the reverse is true. Between the ages of 55-59 the average loan is just over £29,000, between 60 and 69, 35 per cent still have an outstanding loan with an average value of £23,871. The biggest surprise is that 29 per cent of those aged over 70 still have an outstanding loan or mortgage with an average balance of £45,493.

This shows that rises in the cost of living are having an impact on everyone, not just those who are working. It also demonstrates that retired people are choosing to release equity from their homes through some type of loan or mortgage, rather than sell their home and move into something smaller. The average monthly repayment made by retired people on their loans is £218, even though more than half are receiving an income of £10,000 per annum, or less.

With a large percentage of the current working population saving very little, or in some cases nothing towards their retirement and both company and personal pension schemes losing popularity over the past few years, it looks as though the situation for debt levels in retirement is likely to get worse in the future, with more and more people depending on the value of their home to help provide them with an income in older age.

The average price of a house fell once more through the month of June by one per cent, that is nine months of consecutive decreases and the Council of Mortgage lenders (CML) has predicted that we could very well see overall reductions of up to 7% on the average property value by the end of this year.

Now if you’re in the situation where you don’t have a large loan to value ratio on your mortgage or home loan and you don’t intend to sell your home in the near future, then you’ve got nothing to worry about, just because the value has reduced doesn’t mean that parts start to drop off it, or the building gets any smaller! Prices will recover over the long term, it may take some time, but they will recover and if you’re in the position of only having a small loan on your home, then you’ve probably owned it for some considerable time and have therefore enjoyed a high level of growth in value over the years and even with the recent (and projected) drops in value, you are still likely to be in a strong profit situation.

The problem area lies with those borrowers who have bought recently (in the past two years) with a high loan to value mortgage or home loan. Many homeowners have bought their homes with a loan of 95% (or sometimes more) of the value of the property and many of these borrowers could be looking at a possible negative equity situation, that is where the amount of loan on your home exceeds the current value. Once again however, if you don’t intend moving then the market will recover eventually.

Those who could be most affected by the current price drop are those borrowers who had a reasonable amount of equity within their property, but maybe have debts elsewhere through loans and credit cards etc and are considering applying for a secured loan on their home to consolidate their debts. As the equity content reduces, the loan to value ratio closes up and it is less likely that they will be able to obtain a secured loan, particularly in view of the fact that many lenders are now reducing the maximum loan to value they are prepared to offer on.

Finally, if home owners are looking to downsize, or sell their home altogether and they took out a high loan to value mortgage recently, they may be faced with the situation of not even being able to clear the loan once the house has been sold. If you are in this situation, you should take advice before you do anything.

With all the pessimism which is surrounding the housing market and the economy in general at the present time, there is little wonder that no one is willing to commit to buying a new house until things settle down and we see some level of stability return to the price of property.

Coupled with this is the fact that, following the credit crunch many lenders are not prepared to grant loans and mortgages to individuals due to a tightening of lending criteria and even if they do offer a home loan, in many cases the potential borrower is unable to afford the repayments due to high interest rate charges.

As a result, landlords are rubbing their hands together with glee as many people who would normally buy a property are choosing to rent until the situation returns to normal (whatever that is!) Recent research from Paragon mortgages, a lender who specialises in buy to let loans and mortgages revealed that more than 50% of landlords who own residential property believe that the demand for rental property will continue to increase over the next twelve months. The lettings market is in a strong position at the moment, with void periods in properties at an all time low and rental yields now at their highest level since the beginning of 2006 and continuing to increase.

With estate agents struggling to sell any property at all in the current climate, there are some bargains to be had for those landlords who are in a position to expand their portfolios. I spoke to one landlord this week who said that he was being offered properties by agents with discounts of up to 40% below the asking price. With the gap between rental income and house prices closing, the investment yield for buy to let property is starting to look attractive once more and landlords should be able to find it easier to obtain a buy to let loan or mortgage on a new investment property.

New lending on loans and mortgages has fallen to a record low level for the month of May, according to reports from various sources.

The British Bankers Association (BBA) reported that house sales were at the lowest level recorded since records began in 1997, with fewer than 28000 sales completing for the month of May. This figure is down by 20 per cent from last month alone and 56 per cent lower than the same time last year.

As a result, the number of new mortgage applications was also down proportionately and the BBA blamed a combination of tighter lending criteria and greater economic and financial pressures on households for the slow down in applications for new home loans.

At the same time however, remortgage applications have increased as home owners continue to shop around for a cheaper option on their mortgage, particularly those who are reaching the end of their current cheap loan deal.

At the same time as this, the price comparison website Moneysupermarket has reported that its profits are down for the first six months of the year as the credit crunch continues to affect the loan and mortgage market. As a result the group has made the decision to significantly scale down its dealings with financial intermediaries in the loan packaging part of the business.

A spokesman for Moneysupermarket said that the loan and mortgage market remained extremely challenging and that the figures had got worse through the second quarter of the year. Other areas of the business remain strong however and the chief executive of the group said “The strength of our diversified strategy is really evident in the first half. The problems in the UK loan and mortgage markets are well documented and have naturally impacted our activities in that area.”