When house prices fall, many people think it doesn’t matter as long as you are not selling your home at that point, but your equity falls too and this may affect your ability to borrow, as this article points out.
The recent volatility in house prices has probably not concerned you if you had no intention of selling your home over the last few years. For many, this is true, however for those who are seeking to raise money for a business venture or home improvements, then the reduced equity that falling house prices bring, can be a problem.
In a falling property market, the problem for the home owners is that the reduction in value comes from the equity in your house. The amount that you owe on your mortgage remains the same so your share of the property falls first when prices start to slide.
If the fall in the value of your house is so big that your equity is reduced to zero, then your house will be worth less than the mortgage outstanding on it so your will be in an unfortunate negative equity situation.
The property market hit a low point in April 2009 at which point the average house was worth £152,761. A house bought twelve months before for £181,542 with a loan to value of 82% lost £28,781 in value but as the mortgage remained broadly the same, the LTV increased to 92% as the equity in the home was reduced.
The recent rise in house values from the April 2009 low point has helped home owners boost their equity, however. The average house price was £164,288 in April 2010 so this has restored the equity and lowered the LTV to around 85% in our example above.
Why is the equity and LTV important though? The answer lies in your ability to borrow. Even if you do not want to remortgage your house to raise money, you may be thinking of selling your house and moving to another property. The size of the deposit that you can put down on the new home is likely to be dependent on the existing equity of your current house.
As the credit crunch recedes, lenders are becoming slightly more willing to lend again and we are starting to see the return of higher LTV mortgage products. 85% LTV mortgages are now much more available and there are now a number of 90% LTV products for those with good credit histories and low lending risk profiles.
So the recent rises in property prices are good news for home owners (less so for first time buyers, of course), as Martijn van der Heijden, head of mortgages for HSBC explains:
“This analysis just shows how important the rebound in house prices have been for existing homeowners. Whether they have any intention to sell or not, rebuilding the equity in their homes is an essential element in gaining access to lower rates when they come to remortgage.”
As the equity in your home increases and the LTV falls, then you may become eligible for a lower interest rate for your mortgage or remortgage as the risk for the lender is also lowered.