Mortgage warning as fears buyers could be left with negative equity and ‘expensive rates’

Martin Lewis gives advice on paying mortgage with savings

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This week, Halifax reported the average UK house price increased to £261,000 – a rise of 9.5 percent and adding an extra £22,000 to the price. While many homeowners will welcome the news, first-time buyers are being warned they could potentially end up being left with negative equity on their mortgage as a result.

James Andrews, senior personal finance editor at, spoke exclusively to as he warned first-time buyers not to get caught up in the moment when making an offer on a property – particularly if they have taken advantage of a 95 percent mortgage product.

“On the surface, the stamp duty holiday combined with the return of high loan-to-value mortgages look like they have the potential to be great value, and the current demand for property has sent prices soaring,” he said.

“With demand for property so high, many buyers are also being faced with a ‘sealed bids’ situation, which means all interested parties make their ‘best and final’ offers.

“With no knowledge of what the other interested parties are offering, this can lead to homeowners getting carried away and stretching their budget beyond what they can reasonably afford, now or in the future.

“The danger is that after the temporary boost provided by the stamp duty cut is removed, prices could fall.

“Worse, if you’ve taken a 95 percent mortgage you could be left in a situation where you’re simply unable to renew your deal or even sell your home when your introductory mortgage rate expires – as falling prices mean your debt is bigger than the value of your home.

“If this were to happen, you could be left paying the expensive standard variable rate until prices recover enough for you to be able to remortgage.

“And if you think that will happen quickly, you might be in for a surprise, with properties in some areas of the country taking a full decade to recover from the 2009 price crash.”

So, what does Mr Andrews suggest first-time buyers consider when looking at purchasing a property, in order to minimise the risk of negative equity?

Don’t offer more than a property is really worth

“Before entering into a ‘bidding war’ situation, do your research to make sure the offer you make reflects the property’s true value,” he said.

“It is worth remembering that if you offer more than the asking price, then the property could receive a lower valuation in the future when you come to move or remortgage.

“Comparing the property with similar homes in the surrounding area could help you work out if you’re offering more than what it is worth.

“Property websites like Zoopla also provide Market Stats that show the average estimated value for a house in a specific area and how much properties in the same area have sold for recently.

“Understanding how much a home is worth in comparison to similar properties in the area could help you make a decision on whether it is worth offering more than asking price.

“However, it’s important to remember that mortgage providers will have the final say on how much they’re willing to lend.”

Compare mortgages and choose the right one

“For buyers with deposits that only equate to a small percentage of the overall property value, choosing a shorter mortgage term could reduce the risk of negative equity in the future – as you pay off more of the balance of the debt each year – but you need to make sure that the higher repayments are affordable,” the senior personal finance editor said.

Can you overpay your mortgage?

If one does discover their property is in negative equity, there is action which can be taken, Mr Andrews suggested.

“If you discover that your home is in negative equity, then overpaying on your mortgage could be an excellent way to resolve the issue,” he said.

“Most lenders allow borrowers to overpay a percentage of the mortgage without a charge – it is usually between five percent and 10 percent each year.

“But make sure you speak to your lender as mortgage terms and conditions can vary, and additional costs can be involved.”

Boost the value of your property

“If the amount you are likely to raise through the sale of your property falls just short of what you would need to break even on your mortgage, there are several ways you can increase the value of your home without spending too much.

“Look at similar properties on the market in your area to see what they offer potential buyers and at what price.

“You could even arrange a few viewings to see how they compare to your home on the inside and out.

“You may find that there are some enhancements that you can incorporate into your own home to add value at an acceptable cost.”

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