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miser

Can Anyone Out There Explain Just How Negative Equity Works?

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Lets say that somebody who bought back at the height of the boom or thereabouts can manage now with low interest rates and hardly any equity fall so far.

Just how bad is it going to get for these people if prices fall 40% over the next five years and interest rates rise to lets say 6% over an equivalent time period.

I have heard some pretty gruesome stuff from the last crash about banks virtually wanting double their money back from the loss of all that equity.

Also can anyone tell how all the btlers who are running all these interest only mortgages are going to fare as well.

What difference might it make all the different types of mortgages that are around nowadays?

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If you buy a house to live in for the next 25 years, negative equity probably will not affect you. Over that time you will have paid back your dept and will own the house outright. You will not care what the value of your house is unless you are buying or selling it.

Your equity comprises of the sum of the value of all your assets minus the sum of all your depts. Typically your house is your largest asset. When you take out a mortgage the value of your house is about 10% higher than the value of your mortgage debt. If you sold your house you would still have something left over at the end.

If your house value falls by 40%, the house may be worth less than the mortgage dept. Your mortgage is secured against the house, so if you sell your house you will have to pay off your existing mortgage in full. Negative equity occurs when your debts are higher than your assets, basically your house value has fallen below the mortgage debt. The upshot of this is that if you want to sell your house, you will have to find tens of thousands of pounds cash to pay off the mortgage.

Following the last crash, people were either forced to stay in the same home till they had paid off enough of their mortgage so their dept was less than their house price, or the let to buy. This was letting out your current home so that rent paid the mortgage of that house. They were then able to buy another home, or "move up the ladder."

For people on repayment mortgages a rising of interest rates to 6% will not be a real problem. They will have to tighten their belts and go on holiday to Lake District camping sites rather than Puerto Rico, but they will get by.

Buy to Let business will suffer if the rental income does not exceed mortgage repayments. If this is the case they will be making a loss and suffering negative cash flow. The outcome of this will be bankrupcy.

If their rents cover their mortgages, or they do not go into negative equity because they do not have high gearing, they will be fine. They will just suffer from lower incomes.

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Lets say that somebody who bought back at the height of the boom or thereabouts can manage now with low interest rates and hardly any equity fall so far.

Just how bad is it going to get for these people if prices fall 40% over the next five years and interest rates rise to lets say 6% over an equivalent time period.

I have heard some pretty gruesome stuff from the last crash about banks virtually wanting double their money back from the loss of all that equity.

Also can anyone tell how all the btlers who are running all these interest only mortgages are going to fare as well.

What difference might it make all the different types of mortgages that are around nowadays?

In the case of owner-occupied residential property, 'negative equity' merely means that, should you sell your house, the net sales proceeds won't be enough to clear your mortgage(s). If, however, you choose not to sell but can continue to meet your repayments, then nothing really happens because the whole problem is just a paper one. So, whether average property prices drop (or rise) by 4% or 40% makes no difference as long as you can meet your monthly payments. The lender will have no interest in forcing the issue and will carry the 'negative collateral' position.

Where the problem really raises its ugly head is if you become a forced seller e.g. debt, divorce, etc. and, in the meantime, both prices and interest rates have gone against you i.e. interest rate hikes have made your repayments ever more difficult to meet and property prices have dropped. Handing your house keys to the lender doesn't solve the problem either because all that the lender can do is to sell your house at the best price achievable at that time and look to you for the shortfall. You are, of course, liable for your total borrowing not just the value of the house.

In the case of BTL businesses, there can sometimes be clauses in lending agreements insisting on a certain ratio of security cover. e.g. they might want the value of your property to be, say, 120% of your outstanding borrowing. However, these clauses are of little comfort to the lender when the s..t hits the fan because you're unlikely to be able to increase your collateral or reduce your borrowing. They then have to decide whether to ride out the storm or call in their debt and face the shortfall there and then.

I have heard some pretty gruesome stuff from the last crash about banks virtually wanting double their money back from the loss of all that equity.

I think there's some confusion here. High rates, like 15%, can mean that the compound interest accrues to equal your borrowed capital in 5-6 years. Banks don't lose 'all that equity' unless they force you to sell and they are left with a shortfall you can't cover.

p

Following the last crash, people were either forced to stay in the same home till they had paid off enough of their mortgage so their dept was less than their house price...

This is not strictly correct. During this long period of negative equity, many of the banks/building societies accepted the position and agreed to lend to house movers and transferred the 'negative collateral' from one property to another. As an example, they swapped a loan of £60k on a house worth £50k for one of £110k on a house worth £100k. Their position did not worsen and, as a percentage of the house value, it improved. (Presumably, they would, of course, have been satisfied with the repayment record of the borrower.)

p

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A point worth making is that people who are just getting by with a discounted mortgae who have put 10% deposit on their house may well try and switch to another discouted mortage when their discount period (2yrs or whatever) is over. At this point I imagine the new (or maybe even existing lender) will value their house again - if the fall in value has wiped out their 10% then they need a 100% mortage - which will cost more - maybe a 120% or 130% mortgage if the falls have been steep. If they can't remortgage they'll just go onto their existing mortgage holders SVR - which will probably be a bit of a jump in their monthly paymensts - this inability to mortgage tart will hurt some people and cause some forced sales.

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if the fall in value has wiped out their 10% then they need a 100% mortage - which will cost more

The 90% mortgage they had before the 10% fall becomes a 100% mortgage after the fall but will cost the same as it's only 90% of the original house price if rates don't move .

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Guest wrongmove

The 90% mortgage they had before the 10% fall becomes a 100% mortgage after the fall but will cost the same as it's only 90% of the original house price if rates don't move .

WSG's point was that if the borrower wanted to remortgage after an introductory period, they will have to have a new valuation. If they don't remortgage, they will end up on the lenders (expensive) SVR (standard variable rate).

In the event of nominal price falls, they will now have to get a bigger LTV (loan to value) and propbably won't be able to get a cheap deal. This is particularly true for people who lied on their self-cert mortage. They will probably need a cheaper rate than the SVR to be able to service the loan.

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I knew a chap that had a business loan secured against his house.

When the value of his house dropped below his loan.

The Bank asked for their money back.

He lost everything, business, house and his wife left him.

He was a descent hard working bloke, and didn’t deserve that.

But it happened!

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I knew a chap that had a business loan secured against his house.

When the value of his house dropped below his loan.

The Bank asked for their money back.

He lost everything, business, house and his wife left him.

He was a descent hard working bloke, and didn’t deserve that.

But it happened!

I bet you only heard part of the story. Every failed business person I've known - and I've professionally known a hell of a lot - blame someone else, usually the bank. If he was such a 'descent hard working bloke', he should have had no problem getting another lender to take on the loan. But, obviously that wasn't possible. Ask yourself 'why?'. A bank has no interest in calling in performing loans - they let them run. Yes, I've no doubt, you weren't told the full story.

p

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I bet you only heard part of the story. Every failed business person I've known - and I've professionally known a hell of a lot - blame someone else, usually the bank. If he was such a 'descent hard working bloke', he should have had no problem getting another lender to take on the loan. But, obviously that wasn't possible. Ask yourself 'why?'. A bank has no interest in calling in performing loans - they let them run. Yes, I've no doubt, you weren't told the full story.

p

I worked as an accountant in a practice during the last recession and came across a lot of stories like the one above. A lot of people were very unlucky and found banks to be excessively conservative. Plenty of viable businesses went under following wihdrawl of funding.

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I bet you only heard part of the story. Every failed business person I've known - and I've professionally known a hell of a lot - blame someone else, usually the bank. If he was such a 'descent hard working bloke', he should have had no problem getting another lender to take on the loan. But, obviously that wasn't possible. Ask yourself 'why?'. A bank has no interest in calling in performing loans - they let them run. Yes, I've no doubt, you weren't told the full story.

p

You could well be right! patprimer74,

The story he told me was the bank panicked

on the security on the loan and pulled the plug!

I have seen a documentary about a business man

who lived in Broxbourne, (North of London)

right on the river ‘Lea’ (beautiful house)

he also took a business loan out on his house.

He had a letter from the council saying that a by-pass

was being built across his land. (not house)

So compulsory purchase was not an offer or option .

This de-valued his home and the Bank, did pull the plug!

he also lost his home and business (but not his wife!)

The authorities put him and his wife in a council flat!

I don’t know what the up-date was, but he had his MP

helping him with his case against the Bank.

"A bank is a place where they lend you an umbrella in fair weather

and ask for it back when it begins to rain. "

--Robert Frost

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I worked as an accountant in a practice during the last recession and came across a lot of stories like the one above. A lot of people were very unlucky and found banks to be excessively conservative. Plenty of viable businesses went under following wihdrawl of funding.

Why would banks, who make money by lending to safe borrowers, withdraw funding from 'viable businesses'? It's a total and utter myth. In any case, if one bank changed its mind about the safety of its money, surely there would be plenty of others willing to lend - after all, an accountant says that the businesses are 'viable'! Perhaps accountancy practices should put their money where their mouth is - but, they hardly ever do.

p

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I had about 30K negative equity on a 44K flat in the last crash.

I can assure you that the building society does not just sit there and do nothing - they start sending you threatening letters letters suggesting payment plans for you to clear the negative equity. Think about it, if you default on the loan (very likely in that sort of climate), and they repo your house and you do a runner, they're massively out of pocket. It's in their interest to correct this situation as fast as possible to minimise their risk.

It all gets very messy basically.

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You could well be right! patprimer74,

The story he told me was the bank panicked

on the security on the loan and pulled the plug!

I have seen a documentary about a business man

who lived in Broxbourne, (North of London)

right on the river ‘Lea’ (beautiful house)

he also took a business loan out on his house.

He had a letter from the council saying that a by-pass

was being built across his land. (not house)

So compulsory purchase was not an offer or option .

This de-valued his home and the Bank, did pull the plug!

he also lost his home and business (but not his wife!)

The authorities put him and his wife in a council flat!

I don’t know what the up-date was, but he had his MP

helping him with his case against the Bank.

Yes, all these stories make cheap and easy documentaries but I have to say, yet again, that banks don't call in borrowings that are being properly serviced i.e. being repaid in line with arrangements. Why would they? Banks make money from lending money! That's what they do! It's not rocket science. Furthermore, they don't lend just against security but based on their judgement of the individual's or business' ability to repay. Once that's established, they consider whether they need security cover. Sometimes they do, and sometimes they don't. Calling in debts results in losses and banks avoid doing it like the plague.

There will always be claims that businesses have failed due to lack of bank support - that's what failed business proprietors say. It's normal. How often do you hear successful people saying how great their bank had been? The fact remains that more than half new businesses in the UK are primarily financed by bank business finance.

p

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no a.j. is right

in the last recession many businesses were profitable but traded on overdrafts-this is very common.

banks got cold feet and gave many companies ridiculous deadlines to reduce or clear their overdrafts. many couldn't hence they went bust, although the underlying business was sound.

barclays were particular b@stards for this as they were trying to rebuild their own balance sheet, funnily enough after having many property companies like imry & rosehaugh stanhope who had gone bust on them. :(

banks became more conservative and in order to raise any finance, firms had to (quite rightly IMHO) justify what they wanted finance for and had to back it up by producing better quality and more timely information.

these days are back to a certain extent - i've had to do some indepth budgets and cashflows in the last few months for clients to raise capital - a distinct change from when everyone and his dog gets money thrown at them... :huh:

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Why would banks, who make money by lending to safe borrowers, withdraw funding from 'viable businesses'? It's a total and utter myth. In any case, if one bank changed its mind about the safety of its money, surely there would be plenty of others willing to lend - after all, an accountant says that the businesses are 'viable'! Perhaps accountancy practices should put their money where their mouth is - but, they hardly ever do.

p

Accounting practices aren't allowed to invest in their clients - and I've no idea why the banks were so defensive but can assure you they were.

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Wont it be so much harder this time to emerge from negative equity because of the so called low inflation this bunch of clowns are trying to fool us all into thinking exists.

If house prices fall equal to or more than in terms of how they did last time and people had to make good the difference if they needed to move how on earth will they manage this time.

Didnt higher inflation make the recovery all that more managable for those that kept their jobs and still had to make up the difference in price.

Think about it.

Last time prices fell 40% over 5 years but inflation was somewhere between 8 and 10%.

This time prices fall 40% over 5 years but inflation is regarded as between 2 and 3%.

The prices involved are a hell of a lot more now as well in comparison to then.

The average wage rose a lot faster back then than it is ever going to this time.

Edited by miser

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You could well be right! patprimer74,

The story he told me was the bank panicked

on the security on the loan and pulled the plug!

I have seen a documentary about a business man

who lived in Broxbourne, (North of London)

right on the river ‘Lea’ (beautiful house)

he also took a business loan out on his house.

He had a letter from the council saying that a by-pass

was being built across his land. (not house)

So compulsory purchase was not an offer or option .

This de-valued his home and the Bank, did pull the plug!

he also lost his home and business (but not his wife!)

The authorities put him and his wife in a council flat!

I don’t know what the up-date was, but he had his MP

helping him with his case against the Bank.

"A bank is a place where they lend you an umbrella in fair weather

and ask for it back when it begins to rain. "

--Robert Frost

The "Listening Bank" as was was both brutal and incompetent in cases of businesses that I saw working on Receiverships in the '80s.

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  • 301 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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