Negative Equity

[Bravoman]

My 2 year fixed rate is just ending and I'm looking at re mortgaging with a new deal only to find that I've (just) slipped into negative equity :cry: Prices here have dropped by 15%! The flat I had valued last year at £150k is now worth less than £130k.Got to go throw myself on the mercies of variable rate until the market picks up :(

I tried speaking to my current lender Intelligent Finance, before the valuation who wouldn't even discuss a new deal without me telling them what my repayment vehicle was (current mortgage is interest only) Can anyone tell me what a repayment vehicle actually is? I understand that with an interest only mortgage you need a way to pay the capital off eventually...Am I right in thinking that a repayment vehicle has to have enough in it to cover the whole cost of the debt? Funnily enough when they were throwing money at me 2 years ago I didn't need one.....:(

Anyone else in the same position or got any advice :(

[SFletch]

A repayment vehicle is just a fancy way of asking how your are saving up to pay off the loan at the end.

In the old days, if you wanted an interest only mortgage, the lender would demand to see proof of a savings plan; i.e. paying money into an ISA or similar. Of course you could cancel the savings plan the day after the loan is granted.

[Bravoman]

A repayment vehicle is just a fancy way of asking how your are saving up to pay off the loan at the end.

In the old days, if you wanted an interest only mortgage, the lender would demand to see proof of a savings plan; i.e. paying money into an ISA or similar. Of course you could cancel the savings plan the day after the loan is granted.

Thanks for the reply. I guessed it was something like that but when I took the mortgage out 2 years ago there was no mention of getting any repayment vehicle, just a warning that I would have to pay the capital off at the end of the term...IF weren't clear about exactly what they meant by a repayment vehicle and I didn't know whether you needed to prove that you has sufficient funds to cover the borrowing.....

Oh well, just a bit worried about it all really, my mortgage is just about to increase by £200 per month (which is really going to hurt) and I can't sell the place because it's not worth what I borrowed originally.

[pyrogena]

Don't know if it has any bearing but IF Finance are part of HBOS. Might be worth trying to shop around the other lenders?

[Kryten]

If the OP is in negative equity and does not have enough savings to get back to ~20% equity then they are screwed really and must stay with the SVR. There are no 100% mortgages out there now.

The repayment vehicle is the savings plan you must have to pay off the capital at the end. You should have something lined up otherwise how were you intending to ever actually own the house?

[Bravoman]

Don't know if it has any bearing but IF Finance are part of HBOS. Might be worth trying to shop around the other lenders?

Tried that today but its really hard (read almost impossible) to get anything over a 90% LTV mortgage at the moment and I need nearly 100% :(

I didn't realise until today that IF Finance were part of HBOS...I've just finished chasing them through the Financial Services Ombudsman to get them to honour a PPI policy they mis sold to my late father...There is a write up in November's Which? magazine about it :)

[carryonline]

Indeed. You can pay off an interest only mortgage for the full term and at the end of the term that's all you've paid; the interest on the money you borrowed.

You've still got an outstanding debt of £150k

[Bravoman]

The repayment vehicle is the savings plan you must have to pay off the capital at the end. You should have something lined up otherwise how were you intending to ever actually own the house?

I bought this place following my divorce, with the vague plan that it would do for a year or so until I met someone else and moved on.I wasn't thinking too straight at the time though! I would sell it, pay the capital and live re invest any equity in a new property with my new partner....Life doesn't always work out quite like that though LOL :lol:

[ben.bayliss]

I bought this place following my divorce, with the vague plan that it would do for a year or so until I met someone else and moved on.I wasn't thinking too straight at the time though! I would sell it, pay the capital and live re invest any equity in a new property with my new partner....Life doesn't always work out quite like that though LOL :lol:
Not helpful I'm afraid but it does highlight just how strange we are in this country about owning property. Anywhere else in the world you wouldn't have had a second thought about just renting whilst you got yourself sorted.

Why would you buy a place only intending to live there for a year or so with all the costs involved?

Still - you have my sympathy. My only question is how you decided on the valuation? Just because some properties have fallen in value doesn't mean all will have done, or by the same amount. Obviously the valuation you choose to trust will affect what your true LTV is. Have you sought a professional valuation from your current mortgage lender?

[andybhoy]

I take it that when you get into negative equity, no one, not even your current lender will let you have a deal? I have 18 months left on my fixed deal - and would go onto an svr after that - I'm not in neg equity yet but no doubt will be when that comes out.

There's something a bit ****** up that your current lender will say no, you're too much of a risk for us to give you a new deal but hey, we don't mind you paying an extra 3% instead. That's more risky than a fixed deal.

ETA: I already have a potential solution planned - from April I will get a lodger in, which will be roughly the same as the increase in mortgage (I think - my mtg will go from 5.19% to 7%+ on an 83k loan). Then having banked that, I would have enough to cover the extra the following year. Obviously alll assumes that I can get a lodger in!

[Bravoman]

Not helpful I'm afraid but it does highlight just how strange we are in this country about owning property. Anywhere else in the world you wouldn't have had a second thought about just renting whilst you got yourself sorted.

Why would you buy a place only intending to live there for a year or so with all the costs involved?

Still - you have my sympathy. My only question is how you decided on the valuation? Just because some properties have fallen in value doesn't mean all will have done, or by the same amount. Obviously the valuation you choose to trust will affect what your true LTV is. Have you sought a professional valuation from your current mortgage lender?

After my marriage ended (long story short etc...) my 2 youngest daughters came to live with me and we eventually rented the place I am now buying. In Nov 2006 the landlord decided he wanted to sell and offered me 1st refusal at £130k which was slightly cheaper than market value as there would be no agents fees. I got a good mortgage offer from IF and decided the equity from my previous house would earn more money being re invested in property than in the bank (6 months later I was offered £147,500 for the place, which I refused, but that's another story) I also wanted to give my girls some stability and house prices were rising faster than the 1.5% annual pay rises I was getting...I knew I wanted to buy again so it made sense (to me anyway) to buy and not have to worry about new buyers not wanting tenants etc

To be honest if I had accepted the £147,500 offer I would still have been better off (after fees etc) than if I had just left the money in a bank account...

I haven't had a proper valuation by my mortgage company for 2 reasons.

1. They won't even discuss a new deal with me until I give them proof of a repayment vehicle being in place.

2. I don't want to risk paying £200 for a survey and finding out that I am in negative equity anyway..

The valuation I have so far is from 3 local agents who I rang and asked for a valuation. They might not being entirely accurate but I need at least £15k of equity to get a decent LTV and even they aren't going to be that far out.....

[Bravoman]

I take it that when you get into negative equity, no one, not even your current lender will let you have a deal?

I might be wrong, but that sounds like sub prime to me lending on houses with negative equity...Isn't that how the credit crunch kicked off?

[cjanderson]

well why should your current lender off you a deal? they want you to pay the SVR, and they have no reason to encourage you to pay less have they.

[Woz]

well why should your current lender off you a deal? they want you to pay the SVR, and they have no reason to encourage you to pay less have they.


If it's in negative equity they do! If he walks, they're left with assets that are less than the value of the outstanding loan so they lose big time.
I think lenders are going to have to start thinking very carefully about charging people high interest rates if they don't want to be left with a whole load of unsellable property on their hands.

[DeadYankee]

Wow - crazy thread :nuts:

[cjanderson]

If it's in negative equity they do! If he walks, they're left with assets that are less than the value of the outstanding loan so they lose big time.


no, they can chase him for any outstanding after the fplace is sold and mortgage repaid.

[ben.bayliss]

Wow - crazy thread :nuts:
Why do you say that? It's obviously very sad for the OP, but that shouldn't stop people asking questions or making the point about irresponsible lending/borrowing.

Noone has directly accused him of that, or abused him. :shrug:

[SFletch]

Banks will happily lend you an umbrella while the sun is shining.

There are no shortage of loan offers, credit card deal etc. while times are good.
As soon as you *need* the money, it's on their terms or not at all.

They do have shareholders to look after you know.

[KennyVader]

My 2 year fixed rate is just ending and I'm looking at re mortgaging with a new deal only to find that I've (just) slipped into negative equity :cry: Prices here have dropped by 15%! The flat I had valued last year at £150k is now worth less than £130k.Got to go throw myself on the mercies of variable rate until the market picks up :(

I tried speaking to my current lender Intelligent Finance, before the valuation who wouldn't even discuss a new deal without me telling them what my repayment vehicle was (current mortgage is interest only) Can anyone tell me what a repayment vehicle actually is? I understand that with an interest only mortgage you need a way to pay the capital off eventually...Am I right in thinking that a repayment vehicle has to have enough in it to cover the whole cost of the debt? Funnily enough when they were throwing money at me 2 years ago I didn't need one.....:(

Anyone else in the same position or got any advice :(

I have got a couple of friends that bought places on interest-only mortgages in the last couple of years (because that was all they could afford each month, and they HAD to have these houses). They did nothing about repayment vehicles, intending to deal with that issue later, on some future remortgage. Guess they're going to get a shock when the discount period on their current mortgages end :(.

I think one problem that's not been mentioned much is all the talk (on MSE, here, by brokers, Daily Mail money pages etc etc) about just changing to a different mortgage when you reach the end of the 1/2/5 year discount period, and the assumption that you'll be able to easily get a new discounted product (and indeed have been able to the last few years; I've done it myself). It kind of gives the impression that you only need to think 1/2/5 years ahead, and hides the seriousness of the 25 year committment that a mortgage really is.

My first mortgage was an interest-only mortgage but I had a Scottish Widows House Purchase scheme set up alongside it that I paid into and which would (hopefully!) pay off the capital at the end of the 25 years. I changed to a repayment mortgage about two years later though, the Scottish Widows thing was one that you could get the money back out of if you closed it, so I did that and was able to take out a smaller mortgage.

One thing I have wondered but never calculated with Interest-Only mortgages (as I don't really know how to); assuming you never remortgage and kept the same interest-only deal for a full 25 years, at which point you have to pay up the capital in full. Now given that it is 25 years after you bought the house. Would inflation mean that the capital sum required to complete the loan would by then actually be quite a trivial amount, so by then you could just do it with your credit card or something?

[Bapapapa]

How can the OP have a ~£150k interest only mortgage and two years down the line be asking what a 'repayment vehicle' is..!? :nuts:

[Radiohead]

I remember the days when you couldn't get an interest-only without an endowment or alternative in place beforehand....

[KennyVader]

One thing I have wondered but never calculated with Interest-Only mortgages (as I don't really know how to); assuming you never remortgage and kept the same interest-only deal for a full 25 years, at which point you have to pay up the capital in full. Now given that it is 25 years after you bought the house. Would inflation mean that the capital sum required to complete the loan would by then actually be quite a trivial amount, so by then you could just do it with your credit card or something?

OK think I have answered my own question.

If the house costs £150,000 in year 0. If I take a salary of £30,000 and increase it by 3% inflation each year for 25 years, so £30,000 x 1.03 x 1.03 x 1.03 etc, the salary after 25 years of 3% inflation is still only £61,000. Therefore the capital sum of £150,000 while less of a collossal sum than it is today, is still a salary-busting collossal sum in 25 years time. A 25 year mortgage is not long enough for the capital sum to become a trivial and easily repayable amount unless inflation goes mental. Therefore unless you know you're going to inherit a huge amount of money or win the lottery during the 25 years, a repayment vehicle of some sort is always going to be necessary. And the sooner you start it the less you have to pay in to it each month to make the final target.

[DanWilde1966]

I have a repayment mortgage and the fixed interest deal I have comes to an end in two weeks' time. I picked up the phone ten days ago, rang my financial advisor and she told me what to say to my lender... I got another three year fixed-rate deal (5.84%) in twenty minutes flat. Either I've been very lucky, or (more likely) things have just been changing so damned fast in the past few weeks.

[Woz]

no, they can chase him for any outstanding after the fplace is sold and mortgage repaid.

That's hardly realistic is it?
I imagine there's going to be LOADS of people in this position. If the lenders take that attitude, then they're going to be persuing a lot of people for money that the simply have no possibility of recovering.

I remember the last time prices crashed - we were left with a 54k mortgage on a flat that was worth 45k. The interest rates jumped to 14% or something mad, and we went in and said that we couldn't pay and they offered us reduced monthly payments.
Now, if they had simply refused to reduce the monthly payments, they would have been left repossessing a flat and trying desperately to sell it (probably at less than 45k because they would have wanted a quick sell) and then had to persue two 20 year-olds for a 9k debt. At the time, there was NO way we would have been able to pay that back, especially if we were homeless! We'd have declared bankrupt and they could swing for their money.

Like it or not, the lenders have got themselves in this position and they're going to need to moderate their position if they don't want to end up in even more trouble.

[SFletch]

That's hardly realistic is it?
I imagine there's going to be LOADS of people in this position. If the lenders take that attitude, then they're going to be persuing a lot of people for money that the simply have no possibility of recovering.


but they will want to dissaude the 'just hand the keys back' attitude. They are entitled to persue the borrower for the difference. Whilst I agree this isn't necessary a fair or good thing* it is the law as it stands.


*I actually think you should be able to hand the keys back. This would deter the lenders from lending recklessly.

[cjanderson]

That's hardly realistic is it?
I imagine there's going to be LOADS of people in this position. If the lenders take that attitude, then they're going to be persuing a lot of people for money that the simply have no possibility of recovering.

I remember the last time prices crashed - we were left with a 54k mortgage on a flat that was worth 45k. The interest rates jumped to 14% or something mad, and we went in and said that we couldn't pay and they offered us reduced monthly payments.
Now, if they had simply refused to reduce the monthly payments, they would have been left repossessing a flat and trying desperately to sell it (probably at less than 45k because they would have wanted a quick sell) and then had to persue two 20 year-olds for a 9k debt. At the time, there was NO way we would have been able to pay that back, especially if we were homeless! We'd have declared bankrupt and they could swing for their money.



if you owe 20-30k, then i assume they just garnish your income for the rest. Or you go bankrupt and ruin your credit history for a fair few years.

[andybhoy]

I might be wrong, but that sounds like sub prime to me lending on houses with negative equity...Isn't that how the credit crunch kicked off?

I bought the house with a 10% deposit and have a loan that's around 3.6 times my wages, so there's no need to be insulting - I'm not sub prime.

The problem is they have already lent me the money - so if I get stuck on SVR, how exactly is it somehoe worse to give me a better rate? (I'm talking about my current mortgage supplier).

ETA: Of course, I'm actually going to be ok - I have plenty of wiggle room, but that doesn't mean it makes any more sense to tell someone you've already lent money to, that they're too big a risk to offer a deal to, but not too big a risk to pay an extra 50% each month.

[CrumpetMan]

OK think I have answered my own question.

If the house costs £150,000 in year 0. If I take a salary of £30,000 and increase it by 3% inflation each year for 25 years, so £30,000 x 1.03 x 1.03 x 1.03 etc, the salary after 25 years of 3% inflation is still only £61,000. Therefore the capital sum of £150,000 while less of a collossal sum than it is today, is still a salary-busting collossal sum in 25 years time. A 25 year mortgage is not long enough for the capital sum to become a trivial and easily repayable amount unless inflation goes mental. Therefore unless you know you're going to inherit a huge amount of money or win the lottery during the 25 years, a repayment vehicle of some sort is always going to be necessary. And the sooner you start it the less you have to pay in to it each month to make the final target.

"In the old days" I think you could get away with it, my parents bought their house in about 1975 for about £40k if I remember correctly. Still over a years salary if you are on £30k but you could probably pay it off in five years. But it makes little sense to not save something towards paying it off, even £50 a month in a 6% cash isa would return nearly £34k after 25 years.

[cjanderson]

I bought the house with a 10% deposit and have a loan that's around 3.6 times my wages, so there's no need to be insulting - I'm not sub prime.

The problem is they have already lent me the money - so if I get stuck on SVR, how exactly is it somehoe worse to give me a better rate? (I'm talking about my current mortgage supplier).

ETA: Of course, I'm actually going to be ok - I have plenty of wiggle room, but that doesn't mean it makes any more sense to tell someone you've already lent money to, that they're too big a risk to offer a deal to, but not too big a risk to pay an extra 50% each month.

what is their incentive to give you a deal and you pay less? :shrug:

[KennyVader]

I take it that when you get into negative equity, no one, not even your current lender will let you have a deal? I have 18 months left on my fixed deal - and would go onto an svr after that - I'm not in neg equity yet but no doubt will be when that comes out.

There's something a bit ****** up that your current lender will say no, you're too much of a risk for us to give you a new deal but hey, we don't mind you paying an extra 3% instead. That's more risky than a fixed deal.

ETA: I already have a potential solution planned - from April I will get a lodger in, which will be roughly the same as the increase in mortgage (I think - my mtg will go from 5.19% to 7%+ on an 83k loan). Then having banked that, I would have enough to cover the extra the following year. Obviously alll assumes that I can get a lodger in!

They aren't deciding "ah right you can pay us 3% extra now" and reassessing your risk at that point.

The fact is you signed up to a 25 year (or some other very long term) mortgage at or linked to their SVR. For the first x months (ending in 18 months time) you have enjoyed different terms (in your case a fixed rate) but whatever the different terms of that initial x months, it was basically an enticement to get you to take their product.

Those enticements are either not available on their current loan product range, or they've taken a decision not to offer them to customers already with them, or simply that they have changed the risk factors applying to the new products they grant. So there is no reassessment happening, because your contract with them still stands, from whatever date you took the mortgage, and they can't change much about that deal or the risks they were willing to take when you and they agreed it. They are just letting the product you signed up to continue running. The lack of competition and movement in the mortgage market and general tightening up of who can get a mortgage that's happened in the last year means they know their competitors are less likely to be offering similar introductory enticements than they were a year or more ago, thus you are less likely to buy yourself out of your current arrangement with a new mortgage from one of those competitors, thus your lender isn't particularly interested in offering you further discounts either.

This is kind of what I am talking about further up or maybe it was in the other thread, I think the regular mortgage switching that's been common practice the last 10 years or so has led to people forgetting the basic principle of a mortgage being a 25-year agreement! Instead everyone these days only really think about the first 1/2/5 year part of the deal, assuming it would be cost effective to take another mortgage to buy themselves out as the higher rate part finally came along. All of a sudden things aren't working out that way!

[DeadYankee]

Why do you say that?

The OP has purchased a house but omitted to set in place any mechanism for paying for it. I think that qualifies as :nuts:

As for it being "unfair" that rates are going up at the end of a deal - that is the risk you take with switching products. Everyone had an option to take a lower rate for the short term or a higher rate with greater long-term stability. If you made the wrong choice then that's how the dice fall.

[Bravoman]

How can the OP have a ~£150k interest only mortgage and two years down the line be asking what a 'repayment vehicle' is..!? :nuts:

Because 2 years ago when I took the mortgage out the words 'repayment vehicle' were never mentioned to me by any of the IFA's I visited or by my solicitor....It sounds like KennyVaders friends weren't told about it either...in fact I imagine there will be loads of people in the same boat.

I was always aware (as I have said earlier) that the capital would need to be repaid at some point, and my plan was to sell the property after a few years and move onwards and upwards.

I'm sure it's very easy to sit there and judge me and say :nuts: but at the time my marriage had just collapsed, the flat I was renting was about to be sold and prices were rising so fast that if I had left it another month or so I wouldn't be able to afford anything and my priority was to keep a roof over my daughters heads and give them some stability

[Bravoman]

The OP has purchased a house but omitted to set in place any mechanism for paying for it. I think that qualifies as :nuts:

As for it being "unfair" that rates are going up at the end of a deal - that is the risk you take with switching products. Everyone had an option to take a lower rate for the short term or a higher rate with greater long-term stability. If you made the wrong choice then that's how the dice fall.

See previous post for answer. As I said it's easy to sit behind a computer and judge someone...If I had to do the same again I would, this was never seen as a long term purchase, and to pay into an ISA or endowment would probably have made it unaffordable at the time (It took ages to sort maintenance out for the children) but they way prices were rising it seemed like a good risk.

I've never said it was 'unfair' that rates had gone up and my property value had dropped. I've always been aware of how the dice could fall. The thread was more like Oh **** I'm in negative equity and can't get a new mortgage! Anyone else in the same boat and if so how are you planning to cope

[Bravoman]

I bought the house with a 10% deposit and have a loan that's around 3.6 times my wages, so there's no need to be insulting - I'm not sub prime.

The problem is they have already lent me the money - so if I get stuck on SVR, how exactly is it somehoe worse to give me a better rate? (I'm talking about my current mortgage supplier).

ETA: Of course, I'm actually going to be ok - I have plenty of wiggle room, but that doesn't mean it makes any more sense to tell someone you've already lent money to, that they're too big a risk to offer a deal to, but not too big a risk to pay an extra 50% each month.

Sorry mate. I didn't mean to be insulting...I genuinely thought that's what sub prime was about, rather than lending to people with shady credit history.I'm on a very steep learning curve here :( My mortgage is about the same as yours 3.5 times my income with a 10% deposit.

Again my apologies. No insult meant :thumbs:

[Bravoman]

well why should your current lender off you a deal? they want you to pay the SVR, and they have no reason to encourage you to pay less have they.


Err I never said they should offer me a new deal. I said I was throwing myself at the SVR until the market picks up again.... :)

[SFletch]

Bravoman, you have my sympathy. The fact is, it could have been any of us in this situation. When I bought my flat I thought it was the top of the market, but I needed somewhere to live and it was nice and within budget.
Turns out I was wrong about it being the top of the market but I can't pretend it was anything other than luck and circumstance.

I think, even now, you are going to struggle to get a decent deal with over 90% LTV but look around, talk to brokers etc. If there is any way you get hold of the 10k or so (I'm guessing) to bring your LTV down - maybe an advance on an inheritance!? - I'm sure you'll find more/better deals around.

If you want to stay where you are long term, then don't panic. You do need to keep up payments though. If you can't do that then think about making the difficult choices now while you're still in control. If the bank takes control, they'll sell it for whatever they can get and still chase you for the difference.

[Bravoman]

Bravoman, you have my sympathy. The fact is, it could have been any of us in this situation. When I bought my flat I thought it was the top of the market, but I needed somewhere to live and it was nice and within budget.
Turns out I was wrong about it being the top of the market but I can't pretend it was anything other than luck and circumstance.

I think, even now, you are going to struggle to get a decent deal with over 90% LTV but look around, talk to brokers etc. If there is any way you get hold of the 10k or so (I'm guessing) to bring your LTV down - maybe an advance on an inheritance!? - I'm sure you'll find more/better deals around.

If you want to stay where you are long term, then don't panic. You do need to keep up payments though. If you can't do that then think about making the difficult choices now while you're still in control. If the bank takes control, they'll sell it for whatever they can get and still chase you for the difference.

Thanks m8. Yes £10k would just about get me under the 90% LTV bracket. My mum has offered to release some equity in her bungalow, but things aren't that desperate yet. I can still keep the payments going and hopefully IF will reduce their base rate a bit. Can always do a few hours part time to help with the payments if needed too....

I am talking to a few brokers next week to see if they can help and also a few more agents to talk about valuations.

Anyone know of a site to look at Base rates, I can't find anything about IF's base rate? :thumbs: