A mortgage is defined as:
- A conditional conveyance of property as security for the repayment of a loan.
- The deed effecting such a transaction.
A mortgage is a loan, enabling the purchase of a home dependent on its market values at the time of borrowing. The value of the property determines the amount which is borrowed.
And therein lies the potential problem, because, what happens if the market value of the property in question drops below the amount borrowed and outstanding?
When that occurs, the borrower is in negative equity.
Just as mortgages vary in nature, so too they vary in terms of price, repayment schedule and the element of risk.
Mortgage types fall into two categories:
- ‘Fixed rate’ whereby interest remains the same for a pre-arranged period, usually ranging from two to five years, though 10-year deals are possible.
- ‘Variable rate’ in which case interest can change in accordance with what is happening within the economy overall.
With a fixed rate mortgage, the interest rate at which you repay your loan is guaranteed to be the same for the duration of the deal. So if, as happened in mid-1980s, the interest rate soars wildly as a result of events within the economy, those with fixed mortgages are protected from sudden increases in their repayments.
There is, however, a down side which is that at the time of entering into them, fixed rate deals tend to be more expensive than their variable rate mortgage counterparts. In addition, if interest rates fall, those with fixed rate mortgages miss out.
Furthermore, there are penalty charges, should you wish to leave the deal before the agreed term date.
Just as interest rates can fall, they can also rise. If interest rates come down, the borrower benefits. In recent years, for example, those with so-called tracker mortgages have enjoyed considerable savings compared to those on fixed rates who have missed out.
Variable rate mortgages come in various forms, the most popular being ‘trackers’ which are linked to the Bank of England (BoE) base rate. When that changes, so too do mortgage repayments.
Currently (May 2016) the BoE base rate is 0.5%. This means that if you took a tracker mortgage with a rate that is 2% above the base rate your interest rate repayment would be 2.50%. Were the BoE to increase the base rate to 1%, your mortgage rate would rise to 3%, adding about £25 per month to the repayments on a £100,000 mortgage.
Trackers, like fixed rate mortgages, are available over different terms. Again this is usually over two or five years. Here too there are penalty charges should you choose to get out of the mortgage during that term. Alternatively, there are lifetime, or term, trackers. The fact that these tend to be penalty-free makes them attractively flexible for those not wishing to be ‘tied’ into their mortgage.
In truth, if you are on a tight budget, a fixed rate mortgage is almost certainly a safer option. Discount mortgage are another of the ‘variable’ options. They are not linked to the BoE base rate but to the lender’s standard variable rate (SVR).
Negative Equity and Remortgaging
So, how difficult is it for someone currently in negative equity, to get a remortgage? In a bid to kick-start the UK property market, companies are offering negative equity mortgages, even to those with poor credit ratings.
These at-first-glance-illogical deals enable original mortgage buyers to move their mortgage to another property without increasing the mortgage itself.
This means the home buyer will have to have a cash amount greater than the sale price of the original property and this is used to purchase the second. Thus families move to properties in keeping with their budgets.
Those with negative equity now being offered a re-mortgage are, in most cases, victims of circumstances not of their making. They are entitled to a second chance.