'Try not to worry' when remortgaging in negative equity, say brokers

First time buyers are particularly vulnerable to a drop in property value, with those who purchased property with a high loan-to-value ratio at risk of falling into negative equity.

But mortgage brokers and advisers have said this is only an issue for owners who plan to sell and therefore advised others to sit tight and consider a longer term fixed-rate to “weather the storm”.

Estimates vary on where house prices will go in the next year, but many agree there is likely to be a drop of at least 5 per cent.

While this may be good news for potential buyers, it may signal alarm bells for relatively recent home owners with 95 per cent mortgages.

In recent weeks, lenders have been returning mortgage products to market following a mass exodus after September’s “mini” Budget, but a question mark has remained over some of the higher loan-to-value products.

Lenders have been successively cutting their interest rates, with the average five-year fixed rate falling below 6 per cent last week for the first time in seven weeks.

Immediately after former chancellor Kwasi Kwarteng’s “mini” Budget, brokers speculated whether the uncertainty that followed would lead to the “death of the 95 per cent loan-to-value mortgage”.

While this has not yet materialised, some lenders have begun rolling back their offerings. 

Last week, Virgin Money pulled its mortgage range which caters for home buyers who have saved a 5 per cent deposit.

Immediately after the “mini” Budget the risk of homeowners ending up in negative equity was greater, although predictions around a fall in house prices in recent weeks may be fanning the fears of homeowners again.

Mansfield-based mortgage director Mike Staton previously told FTAdviser that the easiest way for lenders to avoid the risk of negative equity was to remove 95 per cent loan-to-value mortgages. 

These products were withdrawn back during the pandemic when lenders were trying to grapple with a similar risk.

Riverside Mortgages founder, Lewis Shaw said homeowners should “try not to worry” unless they are thinking of moving. 

“Categorically, you can't remortgage if you're in negative equity. Remortgaging is moving from lender A to lender B, and you need an absolute minimum of 5 per cent in equity,” Shaw explained.

“Suppose a homeowner finds themselves in negative equity where the value of the outstanding loan is equal to or more than the value of their home.

"In that case, some lenders may still have product transfer rates available, but in other cases, it will mean they'll have to move onto the standard variable rate and sit there until the situation improves.” 

Shaw noted that those buying with only a 5 per cent deposit could come “unstuck” in the next couple of years. 

“That is why anyone with a smaller deposit should consider tying in for at least five years to weather the storm,” he said. 

Others pointed out that it is those who bought new build properties that are most at risk of falling into negative equity. 

R3 Mortgages director, Riz Malik said: “New builds usually carry a premium against similar properties available in the secondary market. Therefore, if the whole market falls in price and your property already had a premium you could be hit the hardest.”

“In these cases, refinancing options may be limited when their deal expires forcing people to remain with their current lender,” Malik explained.

Others in the industry noted that speaking to the current lender should be an individual's first port of call if they are concerned about negative equity.

EHF Mortgages founder, Justin Moy said: “Many lenders still hold products for negative equity clients, such as Barclays, so that will just continue.”

“When we are looking at the need to remortgage or find a new product, and the value is below the mortgage balance, then for the majority of mortgage holders, their lender, via their broker, will be able to help with a product transfer onto a new deal or stay on the standard variable rate if that is cheaper in the short term,” Moy added.

jane.matthews@ft.com