How to tackle low equity in your home…

It’s not just borrowers in negative equity that have cause for concern.

Times are still tough for those with low positive equity.

Falling house prices have plunged many mortgage borrowers into negative equity, in particular those who bought in the middle part of 2007 (now identified as the property price peak), according to trade body The Council of Mortgage Lenders (CML).

It estimates that 900,000 people have already fallen into negative equity and it says that certain parts of the country are affected more severely than others.

According to the CML the concentration of negative equity is by far the greatest in the North, where almost 10% of owner-occupied houses are estimated to be in negative equity.

But in East Anglia, which saw significant negative equity in the 1990s, there is very limited experience of it now. Scotland too has very few borrowers in negative equity — just 1% of total owner occupiers.

The CML also says that two-thirds of borrowers in negative equity have a shortfall of less than 10%.

Low positive equity
But they are not the only people whose equity position could cause them a problem.

Having low positive equity (under 10% for example) can have a similar practical impact to being in negative equity, especially if you want to move house.

This is because mortgage lenders are extremely cautious about high loan-to-value lending, and have all but stopped lending at over 90% LTV with just a handful of deals remaining. In other words they now usually require equity (or a deposit) of at least 10% in order to accept a new mortgage application.

In February last year there were over 1,000 products on offer in the UK with maximum LTV criteria of 90% or above, and over 500 at 95% or above, according to financial information provider Moneyfacts. But as of February 2009 there were less than 100 at 90% and just 10 at 95%. And those higher LTV products that remain are very expensive indeed.

Who does this affect?
The CML estimates that, on top of those with zero or negative equity, there are around 600,000 mortgage holders in the UK whose equity is less than a 5% deposit on an average priced property for a home mover in their region.

And there are a further 500,000 who do not have 10% equity.

This means is that, in total, an estimated two million UK mortgage borrowers would not be able to raise a 10% deposit from their equity, should they sell their home.

But while the range of mortgages on offer above 90% LTV is much more limited and expensive than before, these products do exist. So while it might be expensive for low equity homeowners to move house, it is at least possible.

Below is a range of deals available to home movers with 10% equity and one product for those with less. Note that you may see other deals advertised at 90% or even 95% but many are for first-time buyers only:

90% and 95% LTV home mover mortgages
LENDER TYPE OF DEAL RATE FEE MAX LTV
Post Office Five-year fix 6.01% £599 90%
Post Office Three-year fix 6.02% £599 90%
C&G Five year fix 6.29% £895 90%
RBS/NatWest Two-year fix 6.39% £799 90%
First Active Two-year fix 6.79% £699 90%
Direct Line Two-year fix 6.89% £499 90%
Abbey Five-year fix 7.09% £2,499 95%

Existing lender leeway
For those with low positive equity, or in negative equity, who want to remortgage but are not moving house, there are more options.

At the end of your current deal you will normally move onto your lender’s standard variable rate. While this used to be seen as an expensive option it is currently a very good idea for many borrowers, as lenders’ SVRs are at historic lows.

In addition, you might find that your lender offers you a choice of mortgage in addition to its SVR, even if your LTV is higher that its stated maximum. Halifax and Bank of Scotland for example will allow existing clients in negative equity to fix at a rate normally only available up to 95% LTV, instead of moving onto their SVR. This might be a good option for those who cannot afford an increase in payments and therefore do not want to risk a variable rate.

Yorkshire Building Society will also offer existing clients a deal if their LTV is beyond its usual maximum or they are in negative equity. Nationwide will do this too, but up to a maximum of 95% LTV, above which the SVR is the only option.

Abbey said it will look at cases from existing borrowers that are just over its 95% maximum LTV on a case-by-case basis, but will not offer any mortgage deals other than SVR to borrowers in negative equity.

It’s encouraging to see that if you only need to remortgage, negative equity needn’t mean you have no options, as you could choose between your lender’s SVR and a fixed rate. It’s always worth asking even if they don’t advertise it.

But if you do want to move home things still look tricky, not just for those in negative equity but for anyone with less than 10% equity in their homes. The best thing you can do if you have the money is to overpay your mortgage, try to pay down your debt — and hopefully reduce your LTV.

Published in The property ladder on 21 April 2009

Franck Robert (on Behalf of Amanda Steadman)