125% mortgage deals are back
Coventry Building Society has started offering new mortgage deals to borrowers who already owe 25% more than their home is worth. But is this as irresponsible as it seems?
Nearly a million homeowners fell into negative equity this year, according to the Council of Mortgage lenders. While some of these borrowers took out huge homeloans worth 100% or more of the value of their home, others had put down decent-sized deposits but were simply caught out by falling house prices.
Don't despair about negative equity
If you owe more to your mortgage lender than your home is worth, you shouldn't regard it as the end of the world. As long as you don't need to move home, and can afford to keep repaying your mortgage, being in negative equity really isn't a problem for most people. Eventually, either the price of your property will go up or you'll end up paying off more than you owe.
However, it does become a problem if you are planning to move house - perhaps due to work reasons, or a growing family. You won't have any equity to use as a deposit on your next property and so you won't be able to get a new mortgage.
Similarly, if you want to stay in your current property and remortgage, you may not be able to. 100% loan-to-value remortgage deals are currently few and far between. Instead, you will be stuck on your current lender's Standard Variable Rate (SVR).
That said, this wouldn't necessarily be a bad thing, as some SVRs are offering some very competitive rates right now. But, in the long-term, the only way is up for rates - and you may want to protect yourself now against future rate rises by opting for the security of a long-term fixed rate.
So what can you do in these situations?
Well, some borrowers are luckier than others it seems. Hot on the heels of Nationwide's reintroduction of a 125% loan-to-value mortgage, Coventry Building Society is offering a lifeline to existing customers with little or no equity in their property - allowing these existing customers to borrow up to 125% of their property's value, and still move home or fix their rates.
How it works
Coventry is not encouraging first-time buyers to take out huge homeloans, as some lenders - notably Northern Rock - did in the past.
Instead, the building society is merely trying to help its existing borrowers who are already in negative equity, although the scheme is also open to borrowers who have a small amount of equity (up to 15%). Again, it is difficult for borrowers in this position to find a competitive mortgage nowadays.
Borrowers will not be able to increase their borrowing, however. So if your LTV is 90%, you can't increase it to 125%, for example.
Only existing customers who have an excellent credit history will qualify.
If you meet this criteria, you can either choose to stay on your existing mortgage deal (and still move home) or - if you're currently on the SVR and you're worried about rates rising suddenly - you can take out a new, four-year fixed rate deal with the Coventry. The rate on this deal is 5.59%, which is nearly one and a half percentage points cheaper than the next best four-year fixed rate at 85% LTV, never mind at 125% LTV. So it's a very good deal, especially as it comes with an optional offset facility.
Just be aware there are Early Repayment Charges of 4% of the outstanding balance if you want to switch before the fixed rate period ends on 31 Dec 2013.
Also, Coventry's current SVR is 4.74% (it drops to 4.49% for borrowers who've been with Coventry five years or more), so this deal is more expensive than simply staying on the SVR, which is always an option for anyone in negative equity. So before you jump in, ask yourself: is it worth a 0.85 percentage point hike in your monthly payments for the security that comes with a four-year fixed rate?
Nationwide: been there, done that
Of course, as my colleague John Fitzsimons explained in The return of the 125% mortgage, there is another lender that has already started to help those homeowners in negative equity - Nationwide.
In July, Nationwide reintroduced 125% mortgages for existing customers in negative equity. In this case, customers can take out a mortgage for up to 95% LTV on a three year fixed rate of 6.73% or a five year fix at 7.48%. Customers can then add on the negative equity from the old property, up to 30%, at a slightly higher rate of interest.
Perhaps we will see this trend continue over coming months.
Is this trend a good thing?
The very fact that borrowers can now, once again, get their hands on high loan-to-value mortgages is bound to be controversial, and many of you might regard it as irresponsible. After all, it's this type of lending practice that has been blamed in part for getting us into this mess in the first place.
But I disagree. Providing the homeowner is able to afford the repayments and understands his/her responsibilities, I don't think there's anything wrong with this move from Coventry.
In fact, I would view it as an act of responsible lending, helping those people who need to move but are currently struggling, and enabling borrowers who are worried about rising rates to enjoy the security of a fixed rate deal.
Admittedly, you could argue that these borrowers shouldn't have been allowed to get into negative equity in the first place, and yes, some people who were given mortgages shouldn't have been. But I don't believe those homeowners should be continually punished.
In my view, anything that helps struggling borrowers deal with today's credit-crunched mortgage market is a good move, and more lenders should follow suit.
What to do if you're in negative equity
If you are in negative equity, or at risk of it, and your lender isn't as generous as Coventry and Nationwide, the best way to fight back is to build up the equity you have in your home. To do this, try to overpay your mortgage (if you can afford to) - most mortgages allow you to overpay by up to 10% a year without charging.
If you've got some savings you can put towards this, great. But if not, and you're looking for ways to boost your income, adopt this goal: Make some extra money. Even if you can't afford to overpay by 10%, any overpayment will help you cut your mortgage debt more quickly.
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This article aims to give information, not advice. Always do your own research and/or seek out advice from an FSA-regulated broker (such as one of our brokers here at lovemoney.com), before acting on anything contained in this article.
Finally, we tend to only give the initial rate of a deal in our articles, but any deal which lasts for a shorter period than your mortgage term will revert to the lender's standard variable rate when the deal ends. Before you take out a deal, you should always try to find out from your lender what its standard variable rate is and how it will be determined in the future. Make sure you take all this information into account when comparing different deals.
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