What are the options for borrowers remortgaging in negative equity?

Brokers discuss the impact of a reduction in house prices moving into 2023.

Related topics:  Mortgages
Rozi Jones
28th November 2022
mortgage house prisoner
"Whilst the options may not be available on the open market, I expect lenders' retention options to remain strong and even for those that are placed in a negative equity scenario"

With house prices under pressure and many people having bought high with small deposits, PR platform Newspage, asked brokers what the options are for borrowers who have to remortgage in negative equity.

Lewis Shaw, founder of Teesside-based Riverside Mortgages: “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% in equity. 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. With market expectations that prices are already on the slide, those buying with only a 5% 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. After all, negative equity is only an issue if you've got to sell. If you're not thinking of moving, then try not to worry.”

Elliot Cotterell, director of Bristol-based mortgage broker, Windsor Hill Mortgages: “People need to be conscious of the possibility of falling into negative equity should they take a high LTV mortgage in a property market that could well see reductions in house prices. This will mean that they will fall into the bracket of a mortgage prisoner as they will be limited to remaining on the SVR or carrying out a product transfer with their existing lender using an over 100% LTV product that likely won't be attractive. People won't be able to sell their property without paying the difference to the bank or building society. In my opinion, without changes to government legislation around EPCs for buy-to-lets, this will become a serious problem as we'll see a flurry of buy-to-let properties flood the market being repurposed as owner-occupier, which in turn could cause a drop in property prices, increasing the risk of negative equity for high LTV mortgages. We're advising our clients of the risks around this so that they can make an informed decision.”

Chris Schutrups, founder at Southampton-based broker, The Mortgage Hut: “The UK lending market is different to when we last saw a downturn in 2008, when Northern Rock would lend 125% of the property value. Generally, most buyers we see have a 10% deposit or more, although we do still have lenders who will lend with just 5%. Should a borrower find themselves in the position where prices have fallen and they do not have the option to remortgage away they will generally, but not always, have the ability to do a product transfer with their existing lender that will normally not require further underwriting. It's important when selecting a mortgage lender that you consider the question, "Does this lender allow product transfers" for this exact reason.”

Lea Karasavvas, managing director at Potters Bar-based Prolific Mortgage Finance: “Property prices have performed strongly for the most part of 2022 but we are likely to see a reduction in house prices moving into 2023. Most first-time buyers that have secured mortgages pre-September would have done so at very competitive rates and most likely on a long term fixed, which was very much the product of choice back then. Those that took the short view may well see their properties valued at less than they acquired them for, but most lenders will continue to offer options even for those in negative equity, to retain their business. Whilst the options may not be available on the open market, I expect lenders' retention options to remain strong and even for those that are placed in a negative equity scenario, most lenders will look to support them where they have demonstrated a good record of payment. Whilst they will be lacking a choice of lenders, they will have options aside from the lender's standard variable rate.”

Sabrina Hall of Lichfield-based mortgage broker, Kind Financial Services: “I was unfortunate to be in negative equity when I bought my first home just before the Credit Crunch in 2008. I was still unpacking boxes while the equity was falling out of my house. The reduction in house prices then was much more sudden and significant than the predictions are currently but we could still see a number of first-time buyers find themselves in negative equity. At the moment it's impossible to remortgage to another lender whilst in negative equity or even at 100% equity. Lenders previously offered rates to their existing customers in negative equity depending on what the loan to value was and we did historically see rates for 100% to 120% loan to value. The problem, however, is that these rates were considerably higher than those available to other borrowers. These are not that widely available at the moment but I suspect that this is because we've not needed them for some time. The FCA has been working with lenders for some time to try and find a solution for borrowers who are considered "mortgage prisoners" and if this becomes an even greater problem than it already is, this might fast track this work.”

Samuel Mather-Holgate of Swindon-based advisory firm, Mather & Murray Financial: “Without doubt, as house prices fall, there will be people falling into negative equity. Even if they could pick a fixed rate deal when their existing one ends, it's likely this will be of a similar cost to the SVR that they will fall onto. Of course, if prices hadn't have fallen they could have opted for a cheaper variable rate or have the certainty of a fixed rate that won't continue to rise. The next two years are going to be really tough for homeowners, and those who may be in negative equity should try and reduce costs elsewhere and hang on until rates start receding in the summer. This should bring a boost to the housing market. Of course, those who are in serious difficulty should speak to their lender. They are fairly accommodating these days, and should be able to move you onto interest-only for a short period of time. Those who are still struggling may benefit from the government extending mortgage interest relief on the first £250,000 of your debt.”

Riz Malik, director of Southend-on-Sea-based R3 Mortgages: “Those who have purchased a new build in the last few years may be the first to fall into negative equity, especially if they have taken a short-term fix. 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.”

Justin Moy, founder at Chelmsford-based EHF Mortgages: “Firstly let's recognise that negative equity only occurs when the property is actually sold, so those who have bought recently, but have no intention of selling in the short term, will be unaffected for now. But if this is the case 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. Many lenders still hold products for negative equity clients, such as Barclays, so that will just continue.”

Imran Hussain, director at Nottingham-based Harmony Financial Services: “You can't remortgage to another lender if you are in negative equity. However, the majority of major lenders offer product transfers should you end up in negative equity but the only people at risk of this in the main are those with very little equity right now in their property. This is why we are likely to see many lenders come in and out of the market with 5% deposit products mainly to shield borrowers from any dips in property prices.”

James Miles, director of Exeter-based broker, The Mortgage Quarter: “I do not feel this has taken full effect yet but you’d be blind to ignore the facts and likelihood that prices will drop in some areas of the country. The good news for borrowers is that lenders tend to always have new rates available on offer for existing clients, although it’s less prevalent with small lenders. The hardest to be hit would be borrowers who have bought recently with a low deposit.”

Paul Holland, mortgage broker at Chatham-based Henchurch Lane Financial Services: “Currently, anyone in negative equity would have had to have had a string of bad luck. Prices have only dipped slightly but this hasn't been recorded as even 1% yet despite predictions of somewhere between 5%-10% over the next 12 months. So, if you'd maybe paid a little over the market value in the past 12 months, and secured a mortgage of 95%, then there is a chance you could slip into negative equity. That being said, even if you were on a 2-year fixed, there's a good chance there'll have been a little recovery by the time it comes around to your rate expiring. Lenders will normally offer their existing clients a product switch option at 95% loan to value rates even if they've crept above that since. Remortgaging to a new lender wouldn't be an option until the LTV fell back below the 95% bracket.”

Gindy Mathoon, founder of Derby-based mortgage broker, Create Finance: “If eligible, this is when your existing lender is your best mate. Some lenders have historically offered a new deal to their existing borrowers when the loan to value exceeds 95% loan to value. Accord mortgages is a name that comes to mind. This can minimise any concerns about remortgaging after the current deal expires. To minimise any concerns for high loan to value borrowers, it may be prudent for borrowers/first time buyers to look at a longer term deal, e.g. 5 years, so that they know what they are paying and allay any potential fears of remaining on the SVR after a shorter term deal of two or three years. This may work well as first-time buyers (especially younger borrowers) have a tendency to go for a longer term on their mortgage to spread the payments meaning they are unlikely to pay much off the capital in the early years of their mortgage. This, coupled with potential house prices falling, means a longer term fixed rate may be a wiser move right now.”

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