Homeowners Warned to Prepare Now to Avoid Negative Equity Woes Next Year

Homeowners Warned to Prepare Now to Avoid Negative Equity Woes Next Year

New homeowners are being encouraged to take preparations for difficult times ahead. Many will be facing interest rates very different from the ones they were used to due to eight consecutive increases to the standard base interest rate by the Bank of England’s Monetary Policy Committee (MPC). In simplest terms, the interest rate determines the cost of borrowing. Last December, the base rate was at an all time historic low of 0.1%, now it is 3.0%. Homeowners coming off a fixed rate at the end of their mortgage term could find affording their repayments difficult. 

The last MPC meeting resulted in the largest rate increase in decades. The next meeting, in December, might not have as large an increase, but an increase none the less. It is forecasted the rate could be increased by at least 0.50%. It is also forecasted that a December rate hike will not be the last. The base rate could rise to 5.0% or more next year to gain control of rising inflation.

Homeowners that come to the end of their mortgage term could remortgage. If they do not, they are moved to their lender’s standard variable rate (SVR). Variable is the key word here, as it means the rate will rise and fall as the lender requires, and usually in response to choices by the MPC. A SVR is usually higher than a remortgage rate, so rather than pay more than necessary, homeowners are encouraged to find a deal, especially when rates are rising as they are now.

Currently choosing a fixed rate is the most popular choice as it locks in the rate for the length of the term, thus avoiding further rate hikes for the duration of their deal.

It is easy to shop for a remortgage online. Visiting the site of a remortgage lender and answering a few questions will result in a quote. Going from a lender site to another lender site will put quotes in hand to review. Homeowners could also visit the site of a remortgage broker to gain many quotes from a variety of lenders at one website to review and compare. Brokers could also have exclusive deals that homeowners would not be offered directly from a lender.

Household budgets are being impacted from many sources including inflation, higher energy costs, and higher interest rates. The ability to lessen the impact of higher interest rates could come through remortgaging, especially if it happens before further rate hikes.

There is another difficulty ahead of young homeowners. Due to higher interest rates, home buyers are expected to begin finding affordability an issue. The lack of buyers in the market will cause house prices to decline. For homeowners in a new mortgage, that could be a serious issue.

In the start of a mortgage loan, homeowners pay more on the interest cost of the loan versus the actual principal debt. In other words, they are paying more toward the cost of borrowing rather than the purchase of the property. As time passes, the homeowner pays down more of the loan debt. 

When property values are rising, the homeowner could find their property is worth more than their debt. It naturally occurs as property appreciates in value over time if the home is properly maintained. The amount of the value of the property that is above the level of debt is referred to as equity. 

If property values decline, there is the possibility of the homeowner’s home value falling below the level of debt. It is often called being in negative equity or underwater. The younger the mortgage loan the greater risk of falling into negative equity, as there has been less time for the homeowner to pay down the main debt of the loan or for property values to naturally gain value despite housing market actions.

When a loan is in negative equity, a remortgage is not possible. The homeowner will be required to get out of negative equity and into the zone of lending for a remortgage which is the loan to value (LTV) levels appropriate for borrowing.

The lower the debt to the value of the property, the better remortgage deals offered to the homeowner. It is where the homeowner will likely find the lowest interest rate remortgage offers.

It is important for homeowners to prepare now. A remortgage could put a homeowner into a repayment that is affordable rather than facing difficulties in affordability as rates rise. It is why some homeowners are choosing to take on a penalty to end their terms early to allow remortgaging now rather than when their term ends and could be higher.

It could also be helpful to remortgage before home values begin to decline. The latest report from Lloyds concerning house prices calls for them to drop by 7.9% next year. To avoid getting into negative equity, homeowners should seek to save money and pay into their property debt. It will be easier to do if they have their repayments at an affordable level rather than increasing should they be on their lender’s SVR or facing higher rates when their mortgage term ends.

This is why experts are encouraging all homeowners to shop for a remortgage no matter where they are in their term, whether it has already ended or due to end in coming months as the many that mortgaged on the lowest base rate in history will. Shopping for a remortgage online could put valuable information in hand that might offer a homeowner a safety net in the midst of economic hardships due in the near future.

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