A Potential Route out of Negative Equity

Posted on 2 February 2009

A potential route out of negative equity?

My husband and I have a Together mortgage with Northern Rock for £129,000, but since recent price falls believe our house to only be worth c. £110,000. Between us we earn c. £60,000 and can afford to pay our mortgage twice over (which we are currently doing) but are looking to expand our family and therefore need to move quite soon. We are considering buying a second house to use as our main residence, but don't think we'll be able to rent out our current house due to lack of equity.

Therefore, I wondered if it might be an option to buy a repossessed property at below market value, then sometime after completion, remortgaging to release funds that might be used to clear the negative equity on house #1, therefore enabling us to sell it? (e.g. house #2 bought for £130,000 with a 90% mortgage of £117,000; market value of other similar houses on that road ~£160,000, refinance/draw down equity sometime after completion to release the ~£20,000 needed to clear the negative equity in house #1)??? Is this just too complicated, and are there any lenders willing to finance such a move?

Many thanks,

M

Mary,

 

I am doubtful that your plan will work, firstly because buying as far below market value as you are suggesting is unlikely to be easy. Lenders are required by law to obtain the best possible price on repossessed sales, and to be able to demonstrate they have done so, and I therefore suspect that if you were able to a property at an apparent 20% discount to its perceived value it would probably need money spent on it to bring it up to that value. Secondly, although it should be possible to borrow in total up to about 4 times your combined income, this would only allow you to get another mortgage for about £120,000, and so even though borrowing £117,000 to buy the property should be feasible, it would take your total borrowing very close to the limit, particularly bearing in mind you would presumably be looking to borrow 90% of the enhanced value.

I think a more realistic solution to your problem is to persuade Northern Rock to give you permission to let your existing property. I have spoken to Northern Rock about your situation in general and although, as you are well aware, you are way outside their criteria for a Buy to Let mortgage, in particular the 70% maximum LTV allowed, they may consider giving you permission to let, but naturally will need more information than was in your email. Before they can consider this they will need to know what rent you could expect and at least an indication of how much you intend to borrow to finance your new property.

I therefore suggest you call Northern Rock and explain your situation and ask if they can help by allowing you permission to let, but insist on speaking to one of the underwriters. Don’t go into detail with the call centre staff as they won’t have the authority to take the sort of decisions you need to be made. If Northern Rock agree to do this on acceptable terms please then call us on 0800 71 81 91 so that we can discuss the options with you for a mortgage to finance your purchase.

I presume in your calculations of what is affordable you have allowed for the loss of income while you are on maternity leave and the subsequent increase in costs with a new baby.

Ray Boulger

 

Categories: Buy-to-let, Raising capital out of property, Second properties, Special circumstances

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