To say that the last two years have been eventful for estate agents is quite the understatement, with house prices reaching record highs as world-shifting events caused people to alter their priorities when it comes to where and how they want to live.
This increase in house prices, alongside bank rate increases and other financial events has caused the average two-year fixed mortgage rate to hit over six per cent for the first time in many years, with average five-year fixed rates reaching a very similar level, both according to Moneyfacts.
This has led to several mortgage lenders reducing their mortgage products and restricting their availability and acceptance criteria, particularly for mortgages with a loan-to-value ratio of over 90 per cent (ie. mortgages with a ten per cent deposit).
The reason for this is that with a range of factors causing economic uncertainty in the housing market, there is an increased risk of borrowers ending up in a state of negative equity, sometimes known colloquially as a house being “underwater”.
An owner’s equity value is the difference between the house’s full value and the value of loans against it such as the mortgage.
Initially, a homeowner’s equity is limited to the deposit they paid, but as they pay off more of the mortgage they will, in most cases, increase the amount of equity they have in the property.
In other words, equity is what is left of a house sale after all of the debts have been paid off, and can also increase if the house’s value increases as well.
However, this can work in reverse, and when a home lowers in value, the cost of the mortgage does not, meaning that if there is a property market crash, someone can theoretically owe more towards the cost of a property than the property is worth.
There are other reasons as well, such as in cases where a person has mortgage repayments so low that they do not cover the interest, causing that interest to accrue and increase the cost against the property, lowering equity.
Going “underwater” can make it difficult to sell a home, but as long as you can still make the payments, the situation also does not necessarily have a negative effect.
However, lenders are risk-averse and may avoid providing mortgages where there is a risk that even if they repossess the house in case of non-payment they cannot get their money back.