As house prices follow their downward direction, the thousands who obtained 100% home loans are now facing the risk of negative equity. Those borrowers who have not made considerable payments on their 100% mortgage loans are especially in danger and could face losses if they opt to move to a new property. But it can be avoided with a few important steps. What is negative equity? It is a condition usually brought about by declining house prices. It occurs when your outstanding mortgage is higher than the market value of your property. This means that each month you'd be paying interest on a loan that's greater than the real value of your house. In other words, if you sell your property, you would not receive adequate money to be able to pay off your loan. If the equity on your house is negative, you could owe your bank thousands of pounds more than your property is truly worth. How to avoid negative equity You can lessen its impact, if not totally avoid it, by following these crucial steps: 1. Put down a higher deposit when buying a property. The higher your deposit is, the more equity you have. This means less chances of falling into the negative equity trap. For instance, if the value of your property slides down by 15,000 but you only made a deposit of 10,000, your negative equity will be 5,000. If you had put down a 20,000 deposit, you'd still have equity of 5,000. 2. Pay more towards your mortgage loan if you have a repayment mortgage. By paying your mortgage down faster, your equity will grow and your chances of falling into the negative equity trap will lessen. This is possible by making your repayment period shorter. Also, you can choose to make overpayments. Overpaying, which is approved by many banks, helps you increase your equity quickly without having to be bound to higher payments involved in shorter repayment terms. Watch out for overpayment penalties though - read the small print of your contract. 3. Take on home improvements tasks. By making home improvements, you can increase the value of your home. This typically means that the market value would have to weaken further before the equity on your property falls into a problematic phase. But make sure that the home improvements you'll be working on will definitely add value to your home. 4. If you find yourself in negative equity already, be sure to speak to your lender since they can provide you with solutions to your equity problems. However most of these deals are targeted towards existing borrowers with spotless payment records. 5. One way to avoid problems with your equity is to build your home yourself. Self-builders can take advantage of an average 35% equity gain from the day they move into the property, according to self-build specialist BuildStore. One thing to remember when purchasing a property to build yourself is to buy the land below market value from a distressed seller to ensure immediate profits. Finding such properties is possible by locating genuinely motivated sellers. You don't have to be one of the thousands of borrowers expected to fall into negative equity. The aforementioned advice will help you avoid becoming victim to a stabilising property market.
By making it possible in the first place to purchase the house because of easy loans, many have gone ahead and bought. They were happy, because the property was rising in value, and it was even possible to keep borrowing more money against it.
Naturally, business was booming, money was being spent on all sorts of things like cars, televisions, holidays, etc.
A general sense of well- being and confidence emerged. All governments love this kind of state of affairs, and everybody is happy.
When things begin to change dramatically, it brings problems of huge proportions. It likes to be seen by many, as a general problem rather than a personal one.
Negative equity, one of the boom and bust economy consequences, is bad news as it can also lead to many other problems. The feel good factor is gone, and worry sets in. Less money on the table means fewer goods are purchased, which calls for less demand to produce them, thus less jobs. Many mortgage payments are not being kept up, and repossession dangers come into the equation.
All this can lead to other far reaching repercussions, which in turn can have an effect on many who are not even in the negative equity trap.
There are a number of people, who believe that the shortage of money factor does not always lie in the inequality of opportunity, but often in the inequality of performance. They believe, it is vital to raise the output of personal effort to make ends meet, rather than making it a problem which everybody else must automatically pay for, apart from some cases, where hardship will set in, come what may.
While the remarkable ease to obtain credit was promoting plenty of business and everything was buzzing, it also sucked in an army of people who were not really ready to take on the responsibilities in paying back money borrowed.
Negative equity can lead to social troubles. Also, whenever personal debt starts growing with no visible way out, it causes the problem of loss of consumer confidence.
Recently tax payers have been forced to pay towards the propping up of one financial institution already, and who is to say there will not be repeat performances.
The signs are, it will be more difficult to borrow money, even for worthy customers. Businesses will find it harder to get the credit they need, and all sorts of difficulties will follow.
The irresponsible lending which caused so called happiness, will now result in pain to lender and borrower.
Now let us look at things with less gloom. Firstly, there is the group of people who bought their houses at prices which were relatively low, assuming of course that they have not been topping up their mortgage loans on the strength of the rising prices of property. They would have some way to go before getting into a negative equity territory just yet.
Then there is the other group who bought their houses at an already spiralled upwards price, and are in a more dangerous position.
It is to be noted, that albeit repossession is of course a threat if payments are not kept up, and that some companies start getting worried even after a couple of months of arrears. They can take action by going to the County Court to get a possession action so that they can sell the house and recover their money. Of course there is normally a period of writing and offer making, and solicitors start writing etc., which extends the time before anything does happen.
Most of all this can be avoided, if proper action is taken early. There are a number of expert companies which handle these situations remarkably well. You can argue on terms with the mortgage companies for a start. There are ways how you can rent back your own home, in other words remain in your home as a tenant, and various other ways to pursue.
It is always prudent to be prepared to meet problems or find a way to get out of their way. It may be better to get a smaller house or a flat while there is time. It may be better to sell and move abroad while there is time. Every individual has different problems and possibilities.
There are some very helpful estate agents both here and abroad with nice deals on their books which might be good to consider. To get foreign money, there are some really good foreign currency exchange companies who will give better rates of exchange than most high street banks should one wish to sell and buy abroad.
By being prudent in the future, by extra hard work and looking for the best bargains, things will in due course get sorted out. They will not get sorted out by borrowing to get out of trouble, without a clear reason and plan how to pay it all back.
Both Mary Bush & Paul Dubsky are contributors for EditorialToday. The above articles have been edited for relevancy and timeliness. All write-ups, reviews, tips and guides published by EditorialToday.com and its partners or affiliates are for informational purposes only. They should not be used for any legal or any other type of advice. We do not endorse any author, contributor, writer or article posted by our team.
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