Negative Equity and The Help to Buy Loan
What Is Negative Equity?
Most people buy homes as a long-term investment. This is simply because UK home values have increased since the crash of 08. However, when your property value grows, the share you own also grows with it and this is known as your equity. Just like any investment, there is no proof that growth will happen.
While house prices have decreased several times along the years, the value can also decrease. It can even be worth less than what your mortgage cost. This is known as negative equity. You can also visit Sell Property Fast Cash to read more.
How Can I Calculate the Equity of My Home?
When you have just purchased your home, the equity will be the deposit that you spent. So if you bought your home with a 30% deposit, your equity will be 30% of your home’s value. However, equity increases when you repay your mortgage and your share increases.
Am I At Risk for Negative Equity?
Since the value of properties fluctuates so much, there is no need to panic. If your property value slightly decreases, it would need to drastically fall to less than your deposit before you go into negative equity. With that said, there is still the chance that the market can crash. After the crash in 08, prices fell by £30000.
This decrease in price led to homeowners seeing a 15% drop in just one year. The previously quoted drop should only be used as a guide and in no way actively predicts the drop in any area.
How Does Negative Equity Affect My Finances?
Negative equity puts anyone in some sticky financial situations. If homeowners were interested in selling their property, they would not make a profit which leaves them to repay a hefty loan. In the case of remortgaging, the desired lender would almost likely not construct a new deal. This is because the homeowner’s property is not enough for security.
This puts a homeowner at the end of the lenders’ stick when the deal expires. However, negative equity may not impact the owners’ credit score unless their payments are default, they cannot make the shortfall, or they need to move. In the instance where a homeowner can stay at their location and successfully meet payments, negative equity will not affect them.
What Should I Do If I am Already at Negative Equity?
If you are in a state of negative equity, the options available to you will depend heavily on your financial circumstances. If you can afford to stay at your home and meet the required amounts that you will need to repay each month, you will be able to build your equity. Additionally, it is recommended that you make over-payments.
If your current mortgage deal permits over-payments, it can reduce your loan faster than usual. However, mortgages are higher when compared to saving interests. This puts you in a space to put more down on your mortgage instead of saving all.
When the prices begin to rise again, the negative equity that you have racked up will decrease. This puts you in a better position to have all this reversed. In some instances, homeowners can renovate their properties and add new and exciting features to increase the value. If they are planning on selling, this even can take a turn for the best or it can leave you spending more than you will receive.
Help to Buy and Negative Equity
Currently, there is a loan that most view as a scheme where the government lends homeowners up to 20% of their purchase price and up to 40% in London to obtain a share in the property. During the first 5 years, owners are completely interest-free. However, at least 5% must be deposited before a mortgage of 75% can be taken out.
When homeowners buy with a small deposit, they risk the chance of house prices eroding. If for some reason you should fall into a negative equity situation with the Help to Buy Loan, you’re more than better off than if you faced a 95% mortgage. This is because the government owns a percentage share on the house.
If the property value decreases by £50000, owners will now owe roughly £10000 less while using a Help to Buy Equity Loan.
Negative Equity and Guarantor Mortgages
In the case of being a first-time buyer, there are many struggles for jumping on the property ladder. In these instances, many turns to family or guarantor mortgages. These allow families to take out a 100% loan while they offer their savings or house as security.
If a person is forced to sell their property when they are in negative equity, a member of the family will be liable. This can result in families losing their homes. Hence, these decisions should be taken carefully as you determine if you can successfully make your monthly payments.
As we conclude we have just looked at negative equity and how it affects homeowners. In some instances, families run the risk of losing their homes if they fall into negative equity. In other cases, they are stuck with homes that constantly lose value and chances of selling are slim. Before you make any decisions that could leave you losing your home, be sure that you are in a financial position to face the consequences.
