If you’ve been saving for a property and you’re almost ready to buy, you may be wondering if now is a good time and if you’re at risk of going into negative equity on your first home. Here’s what you need to know…
Last month, banks warned that falling house prices could leave some mortgage holders at risk of going into negative equity.
A spokesperson for Lloyds Bank said that first-time buyers could be more at risk, as they tend to have higher loan-to-value rates on their homes (the ratio of what you borrow in relation to the value of your property).
He went on to say that banks need to ensure that first-time buyers are resilient and can afford to keep paying their mortgage during a two-year period where prices could fall.
With house prices dipping slightly, if you plan to buy your first home soon, you may be worried about the risk of it losing value quickly if property prices fall further. In essence, you could end up owing more on the mortgage than your property is worth, especially if you borrow up to 95% of the property’s current value.
Negative equity could be short-lived
If you’re a prospective first-time buyer, should you be worried about this happening? In reality, it may not be a concern; if it happens, it could be temporary. A spokesperson for Nationwide said that anyone entering into negative equity may only be in it for a short period.
‘Negative equity isn’t something we’ve spoken about for a while,’ says MB Associates Sales Manager Phil Leivesley. ‘The last time this was widely discussed was in the immediate aftermath of the Great Financial Crash in 2008, where some homeowners, through no fault of their own, bought at the wrong time and found themselves in negative equity for a period of time. Some regions recovered quickly, but others didn’t. I would urge caution for anyone buying with a five or even a 10% deposit at the moment.’
Put down a bigger deposit
Phil agrees with Nationwide that a negative equity scenario could be brief and may not even happen. ‘It may only be for a brief period, if at all,’ he says. ‘However, one way to combat the risk is to have a bigger deposit. This will protect you against negative equity.’
If you plan to be in your first home for a long time, negative equity will be less of a risk. ‘Even if you did find yourself in negative equity for a short period, then the situation may resolve itself before you are looking to move again or remortgage,’ adds Phil.
Negotiate on the asking price of a property. Make sure you get the best possible deal. Ensure you’re paying market value for the property you intend to buy. Do your research on the prices of comparable homes in the same area. If you have your mortgage offer lined up and you’re ready to move quickly, use this to negotiate with the vendor.
Other ways to protect yourself
While mortgages are available for those with a 5 or 10% deposit, the more you can put down, the less likely you risk going into negative equity. And there are a few other ways to protect yourself.
If you do find yourself in a negative equity situation, know that the situation may work out. Property prices will go back up at some point.
In the meantime, continue making your monthly mortgage payments and wait for the equity to rebuild.
If you are concerned or hoping to move sooner rather than later, try to make regular overpayments on your mortgage – even if it’s just by £50 or £100 per month. This will reduce the amount you owe. Most lenders allow you to overpay by up to 10% per year, but check with your lender to be sure.
Overall, the value of your home may not be an issue if you don’t plan to move for a long time.
What’s happening with house prices?
You may wonder what’s likely to happen to house prices and how much they will fall.
A recent Rightmove report showed a modest drop of 1.9% in asking prices in August, and house prices are 19% higher than before the pandemic.
Zoopla is predicting a 5% reduction in house prices by the end of this year, but in reality, no one can say for sure what will happen. ‘I see perhaps a gentle drift down in prices, which is understandable given how the cost of borrowing has increased,’ says Phil. ‘Many people are predicting some big reductions, but I fundamentally disagree that will happen. Halifax and Nationwide recently announced their figures, showing only a mild price reduction. We’ll see a fairly modest fall in the next 12 to 18 months.’