Mortgage question -

[whynow]

Hi All

I should know this, I asked an accountant at work who also didn't know it but I'm sure you guys will. It's a question about negative equity if you don't want to move.

What happens if:

I buy a house today on a 5 year fix for £500k (25 year mortgage)

I pay 15% deposit (£75k) and over those 5 years pay down another £25k lets say for arguments sake.

I've paid by the end of the 5 years £100k into this house, the balance on the loan is £400k, BUT the property has reduced in value by 30%.

So now I have a house worth by valuation just £350k, my mortgage is now up for renewal, and I owe £400k on the original purchase price.

Does the house get revalued at that point and the bank can see that their LTV is now over 100%, what happens? They take the house? They put me on a horrible punative deal?

I am making all kinds of assumptions but I'm unsure of the implications once the 5 years is up. I have a new baby in a 1 bed flat, pressure to buy - have a 10% deposit and now 10%s are out. Im also worried about finding the deposit but also value dropping so much I'll be in the situ below.

How does it work with negative equity from the banks side?

[Jim Bexley]

The mortgage agreement you sign will actually be for 25 years (or whatever) so as long as you’re making your payments they wouldn’t repossess.

I could be wrong on this but I also don’t think they can make you pay to revalue it unless you do something to trigger it (like asking for a new deal).

The five year period you’re talking about is just a reduced fixed rate that is part of the longer 25 year agreement. Once that comes to an end you’ll be stuck paying the much higher SVR but they won’t repossess it - assuming that’s what you’re worried about?

But if, like lots on here, you think a drop in prices is coming why not wait it out? At least until you have a better idea of what affect corona has had on the market.

Could save you a lot of money (and stress) in the long run.

[GregBowman]

31 minutes ago, Jim Bexley said:

The mortgage agreement you sign will actually be for 25 years (or whatever) so as long as you’re making your payments they wouldn’t repossess.

I could be wrong on this but I also don’t think they can make you pay to revalue it unless you do something to trigger it (like asking for a new deal).

The five year period you’re talking about is just a reduced fixed rate that is part of the longer 25 year agreement. Once that comes to an end you’ll be stuck paying the much higher SVR but they won’t repossess it - assuming that’s what you’re worried about?

But if, like lots on here, you think a drop in prices is coming why not wait it out? At least until you have a better idea of what affect corona has had on the market.

Could save you a lot of money (and stress) in the long run.

As you say Jim they don't give a tinkers about the valuation once your paying but any break including a mortgage holiday as many are about to find out could mean they look at you differently

However all that side as you say why buy now ?

 

[shlomo]

9 minutes ago, GregBowman said:

As you say Jim they don't give a tinkers about the valuation once your paying but any break including a mortgage holiday as many are about to find out could mean they look at you differently

However all that side as you say why buy now ?

 

If Not Now, When? 

Hillel the Elder

[Hullabaloo82]

Depends on the lender I guess. Neither Santander nor HSBC wanted to come and survey my house when I've remortgaged with them in the past, it was just a 5 minute call to select my next mortgage product. Caveat: I've never remortgaged with possible negative equity though. My experience of banks generally though is they'd rather have you on the hook paying your monthly repayments than risk the hassle of selling the house. 

Biggest risk is if interest rates go up. That's likely where they will stick you on a punitive rate. 

[Novicebuyer2020]

The trouble will be though you will pretty much HAVE to re-mortgage after the 2 or 5 year fixed term because they put the interest up so high after this no?

Is it not the same as always picking a new car insurance company because they lure you in with newbie rates then jack them up, so you make a quick check on GoCompare and hop over elsewhere. 
 

I assume most people take a fixed rate deal with re-mortgaging elsewhere when they term is up, and may struggle to pay the ‘actual’ rate for the rest of the 25 years if sticking?

This was my plan anyway. Keep jumping to new deals. 

[Odin]

2 hours ago, Hullabaloo82 said:

Depends on the lender I guess. Neither Santander nor HSBC wanted to come and survey my house when I've remortgaged with them in the past, it was just a 5 minute call to select my next mortgage product.

Ah but is that because they look at the 2/3/4/5 year time period, the pricing change climate and their computer says you have enough equity and an increasing asset value over the previous years time period to cover the remortgage so they do not require a new survey.

But what happens in the OP scenario ?   Computer now says there might not be enough equity by the owner to cover the risk, so they could well start asking for a new survey, or 85k (50k+35k new deposit for 90% LTV) to cover LTV, because at the end of the day their risk is based on the resale value of the undelying asset.

I think the OP has good reason to be concerned if their intention is to get remortgage at the end of the fix.  Also 5y is a long time now to think the remortgage market will be the same as it is today (or has been in the recent past) in 5y in the future.  Really ask yourself if you can afford SVR at that time, keeping hold of someting is better than loosing it all (including your deposit+equity) 5y later in what maybe still a falling market that the OP is describing.

However like another poster said, the original mortgage they agreed for 25y remains for 25y as long as you keep up those repayments, which at the end of the fix we assume will go onto SVR.  Can you afford the SVR ?   IR maybe still low in 3y but will they still be low in 5y, 7y, 10y ?  Some theorys say that will not be possible as inflation is needed to get out of the world situation now and stay in the same monetry system.

Edited June 13, 2020 by Odin

[Fred1981]

If you really have to move for space for your family, why not consider a 10 or 15 year fix. Also ask DurhamBorn about hedging your mortgage with inflation loving investments. His son has just done this. Make sure any mortgage you take is portable and allows overpayments. Some 10 year fixes only have an early redemption charge for the first 5 years. Good luck.

[Fred1981]

I should add AVOID newbuild and Help To Buy schemes.

[Quiet Guy]

To repossess, the lender would have to convince a judge to make a repossession order which seems very unlikely to me if the borrower has been keeping up the agreed payments. I don't think any judge would allow it, nomatter what negative equity.

It would also be a potential PR nightmare for the lender.

Lenders surely know that the UK housing market is going to be hammered in a year or two and would better off focussing on the coming defaults, not customers who honoured their contract.

[spyguy]

On 12/06/2020 at 13:07, whynow said:

Hi All

I should know this, I asked an accountant at work who also didn't know it but I'm sure you guys will. It's a question about negative equity if you don't want to move.

What happens if:

I buy a house today on a 5 year fix for £500k (25 year mortgage)

I pay 15% deposit (£75k) and over those 5 years pay down another £25k lets say for arguments sake.

I've paid by the end of the 5 years £100k into this house, the balance on the loan is £400k, BUT the property has reduced in value by 30%.

So now I have a house worth by valuation just £350k, my mortgage is now up for renewal, and I owe £400k on the original purchase price.

Does the house get revalued at that point and the bank can see that their LTV is now over 100%, what happens? They take the house? They put me on a horrible punative deal?

I am making all kinds of assumptions but I'm unsure of the implications once the 5 years is up. I have a new baby in a 1 bed flat, pressure to buy - have a 10% deposit and now 10%s are out. Im also worried about finding the deposit but also value dropping so much I'll be in the situ below.

How does it work with negative equity from the banks side?

No.

The bank wont do anything as long as you keep paying the mortgage.

The bank lent you the money not the house.

Theres no such thing as a renewal. You may have a short low rate or fixed period.

In this case you'll be in shit as the SVR tends to shoot up and you need every bit of LTV to remortgage.

 

[crazypabs]

On 12/06/2020 at 13:07, whynow said:

Hi All

I should know this, I asked an accountant at work who also didn't know it but I'm sure you guys will. It's a question about negative equity if you don't want to move.

What happens if:

I buy a house today on a 5 year fix for £500k (25 year mortgage)

I pay 15% deposit (£75k) and over those 5 years pay down another £25k lets say for arguments sake.

I've paid by the end of the 5 years £100k into this house, the balance on the loan is £400k, BUT the property has reduced in value by 30%.

So now I have a house worth by valuation just £350k, my mortgage is now up for renewal, and I owe £400k on the original purchase price.

Does the house get revalued at that point and the bank can see that their LTV is now over 100%, what happens? They take the house? They put me on a horrible punative deal?

I am making all kinds of assumptions but I'm unsure of the implications once the 5 years is up. I have a new baby in a 1 bed flat, pressure to buy - have a 10% deposit and now 10%s are out. Im also worried about finding the deposit but also value dropping so much I'll be in the situ below.

How does it work with negative equity from the banks side?

From a legal perspective the bank have every right to make what is called a'margin call'. Assuming your mortgage LTV rate was 85% at the time you entered into the contract, then the bank can demand that this 85% LTV rate is reset once the property has been revalued down to £350k, as you currently owe £400k then the bank can demand you make a lump sum payment of £400k - (£350k × 85%) 

that is £400k - £297.5k = £102.5k

If you can't pay this margin call of £102.5k then you are deemed in breach of the terms and the bank can possibly apply for the foreclosure.

However, what they can do and will do are two very different things.

 

[dirtysteve]

2 hours ago, crazypabs said:

From a legal perspective the bank have every right to make what is called a'margin call'. Assuming your mortgage LTV rate was 85% at the time you entered into the contract, then the bank can demand that this 85% LTV rate is reset once the property has been revalued down to £350k, as you currently owe £400k then the bank can demand you make a lump sum payment of £400k - (£350k × 85%) 

that is £400k - £297.5k = £102.5k

If you can't pay this margin call of £102.5k then you are deemed in breach of the terms and the bank can possibly apply for the foreclosure.

However, what they can do and will do are two very different things.

 

sounds far fetched to me. So long as you’re paying the mortgage at the new SVR and not prodding them asking for a new deal they won’t even be looking at you. Never heard of banks making margin calls like this. This is a mortgage not a spread betting account.

[house-down]

This thread amazes me for how stupid some people can be 

 

if after your fixed term your luv has changed 5hat will affect your product transferor remortgage options. If you are in negative equity you obviously can’t go to another bank. 
 

instead you won’t qualify for any product transfer deals and will sit on the svr rate 

 

they use an index to wrk out the new house valuation rather than surveying it again 

[tm_81]

It is not clear also if by "pay down" another £25k, you actually mean:

1. Have monthly payments set to pay back £25k of the debt, which totals 25k, plus whatever the interest is for 5 years, which for example at 400k at 2% will be another 8k JUST for the first year. (actually it is probably compounded monthly so you need to make an excel to find the exact value, but 8k is close enough).

OR

2. have made  25k in payments, in which case, after 5 years you have not made nearly as  much of a dent in the loan amount !!

 

In either case if you are concerned that 5 years is not enough if you factor in a price fall, you can always get a fixed rate for 10 years. They are not that much more expensive considering our current interest rate environment.

And if you read the terms and conditions, they are likely transferrable too if you want to move before the 10 years are up. Thats what I would do, if I had to buy in a falling market.

Of course, none of this is financial advice etc etc.

This also probably belongs to the Mortgage sub forum as well.

[tm_81]

In case you haven't done the math yet, the interest part alone is much much higher than 25k over 5 years. More than double that.

[tm_81]

ok - maybe not more than double, but close to 40k - but you get the idea.

[dugsbody]

17 hours ago, Novicebuyer2020 said:

The trouble will be though you will pretty much HAVE to re-mortgage after the 2 or 5 year fixed term because they put the interest up so high after this no?

 

I've been with several different lenders. At the end of my first fixed term I just applied for a standard roll-over mortgage with the same lender, no revaluation. All very simple, on to a new fix. Later I actually switched lenders to remortgage and withdraw equity. That did involve a revaluation because I was switching lenders. But I plan to just roll over onto a new fix at the end of current term, and no revaluation needed. 

You'll be fine. Lenders don't actually want negatively valued assets on their books.

[A.steve]

On 12/06/2020 at 13:07, whynow said:

LTV is now over 100%, what happens?

While I can't prove it, I believe the lender will do everything they possibly can to pretend that the LTV is not over 100%.  They will try to avoid forcing a valuation.  The lender does not care a jot about the asset itself - they only care about your debt... and that you are compelled to honour it.

Lenders like to maximise the spread (difference between your mortage rate and their wholesale funding costs) - as that's where they make profits.  The main mechanism by which rates offered to you are kept down (relative to wholesale funding costs) is competion between lenders. The lender will not want you to default - but they would love it if you became financailly constrained and had to take out other loans at higher rates than mortgage rates.  Their optimum outcome is that you repay your debts as slowly as possible - always meeting their minimum payments - and depend upon them to issue futher credit with interest rates between 5% and 25% in order for you to remain solvent.

As advice, if you're not intending to sell the house (and you are fairly confident that your circumstances won't change in such a way to reverse this) then you need to be confident that you can pay down the debt, over a period with which you are comfortable (without selling any house) even if interest rates rise (and they could rise substantially in less than 25 years).  If you want the house, and you can afford it, then your offer will be for the right price for you.

 

[captainb]

13 hours ago, crazypabs said:

From a legal perspective the bank have every right to make what is called a'margin call'. Assuming your mortgage LTV rate was 85% at the time you entered into the contract, then the bank can demand that this 85% LTV rate is reset once the property has been revalued down to £350k, as you currently owe £400k then the bank can demand you make a lump sum payment of £400k - (£350k × 85%) 

that is £400k - £297.5k = £102.5k

If you can't pay this margin call of £102.5k then you are deemed in breach of the terms and the bank can possibly apply for the foreclosure.

However, what they can do and will do are two very different things.

 

Is there ever any evidence of this ever happening in property? Or even being in the legal terms of any mortgage?

Yes if i borrow against shares on margin, there is a daily M2M value and as per the contract you can get margin called. The contract is set up like that as equities are highly liquid (or certainly the ones where you get credit against) as such if a margin call is not met the assets can be liquidated the same day and you are closed out.

Property is not like that, there is no daily M2M value, it is not liquid and the contracts are usually (as in none i have ever seen) not set up like that. You may have problems remortgaging off a teaser rate but they will not "margin call" someone making the monthly payments.

Edited June 14, 2020 by captainb

[24gray24]

1. I don't think you have to maintain a certain amount of equity in a residential property. ( only on buy to let) .as long as you keep paying the mortgage you're fine.

2. Where you will lose is on the interest rates after the fixed rate ends. Especially if interest rates go up. The reason is because you won't be able to change mortgage if you're in negative equity, so you're captive. Hence the lender can just double his margin on that product as a) you can't leave and b) everyone who stays is also in negative equity. 

I'd ask a mortgage broker, if you can find one who knows about negative equity penalties; I'm not a mortgage broker. 

You have to balance that against the risk of significant future inflation to pay for all this government largesse. Odds are that anything you win in wage inflation you will lose in higher interest rates. So it boils down to how many years do you waste waiting for house prices go down before you end up paying the same total anyway, when you include the higher interest payments. The only thing I'd say is don't buy if you can't afford to make overpayments large enough to prevent negative equity ( whatever you guess that amount is); as being able to change lender will get you a much better rate when the fixed rate ends. 

Personally I'd wait, as there is a good chance of large drops in a big recession, and the recession will be here within 6 months. 

Edited June 14, 2020 by 24gray24
Put other side

[iamnumerate]

Can't you look online for a mortgage for this scenario and see what the interest rate would be?  I think it would be tricky to remortgage in this case.

[Peter Hun]

23 hours ago, captainb said:

Is there ever any evidence of this ever happening in property? Or even being in the legal terms of any mortgage?

Yes if i borrow against shares on margin, there is a daily M2M value and as per the contract you can get margin called. The contract is set up like that as equities are highly liquid (or certainly the ones where you get credit against) as such if a margin call is not met the assets can be liquidated the same day and you are closed out.

Property is not like that, there is no daily M2M value, it is not liquid and the contracts are usually (as in none i have ever seen) not set up like that. You may have problems remortgaging off a teaser rate but they will not "margin call" someone making the monthly payments.

I think its extremely unlikely, if not impossible for regulated loans, i.e. your home. Investments (BTL, second homes etc) are another matter.

[richmondtw]

On 6/13/2020 at 10:18 PM, crazypabs said:

From a legal perspective the bank have every right to make what is called a'margin call'. Assuming your mortgage LTV rate was 85% at the time you entered into the contract, then the bank can demand that this 85% LTV rate is reset once the property has been revalued down to £350k, as you currently owe £400k then the bank can demand you make a lump sum payment of £400k - (£350k × 85%) 

that is £400k - £297.5k = £102.5k

If you can't pay this margin call of £102.5k then you are deemed in breach of the terms and the bank can possibly apply for the foreclosure.

However, what they can do and will do are two very different things.

There is less than zero chance of a bank repossessing in that instance

If you are paying the mortgage they are happy 

[crazypabs]

May 2008 (we all remember what happened then) this topic was also discussed but tailored around BTL.

 

 

Margin calls do exist, but as I said previously, what the bank's do, is quite different to what they are allowed to do.