An 8% drop in home prices could put 16% of owners between the ages of 16 and 34 at low or negative wealth over the next two years, according to think tank Resolution Foundation.
Negative equity becomes a problem for homeowners in two situations. If you have to sell, you will have to pay the difference to the lender. Also, people who have negative assets when their fixed-rate mortgages mature will have a hard time refinancing.
Lewis Shaw of broker Riverside Mortgages said:home loan refinancing [can] means moving from one lender to another, [for that] A minimum of 5 percent equity is required. ”
“If you’re stuck in negative capital, it’s basically impossible to switch lenders without paying more on your mortgage,” said Aaron Strutt of another broker, Trinity Financial.
This means that borrowers cannot look for the best deal and have to stick with their existing lenders. This means you may have to pay much higher interest rates.
Many mainstream lenders offer a “goods transfer” option to existing borrowers. This is a new affordable deal that doesn’t need testing. In some cases, the product transfer rate is comparable to the rate of new business. But in other countries it is much more expensive.
Some lenders such as NatWest, Nationwide and TSB offer loan-to-value remittance rates of 100pc and above.
Mortgage broker Private Finance’s Chris Sykes also pointed to high street lenders extending 90 percent loan-to-value commodities transfer agreements to borrowers with up to 99 percent LTV.
However, it will then transition to a standard floating rate. For some borrowers, SVR will be the only option. Because some lenders don’t set a transfer rate at all.
Sykes warned that moving to SVR in 2023 or 2024 will be a much bigger deal than it is today. This is because SVR moves with bank rates. Market expected to rise to 4.5% from current 3%.
“Similar to Tracker, SVR has not yet taken into account future bank rate increases. So far, it doesn’t look too bad, but it’s usually two percentage points above fixed rates,” Sykes said. said.
If the homeowner has a loan balance of £200,000, a 2% difference in the mortgage rate would cost £4,000 in extra interest per year.
“They will have to stay there until the situation improves,” Shaw said.
Homeowners are also paying back capital after purchase, which helps mitigate the risk of negative capital, but in small amounts. Borrowers tend to pay less at the beginning of the mortgage term.