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Negative Equity

Today this column hosts a very good friend, The Negotiator. This is a man who will find you solutions when it doesn’t seem possible.

In these troubled times there is every reason for me to host the Negotiator.

The lady on SKY News said ‘….many people are facing negative equity.’

Why did the newsreader present this as such a catastrophe? Bad news sells better than good news.

The first question is ‘what is negative equity?’ It’s what happens when you have a mortgage equal to most or all of the value of your house, the market drops, and suddenly your house is worth less than your mortgage.

We have established what it is, who’s likely to catch it and what should they do?

Anybody with a least one property against which they were borrowing over 75% of its value in 2007, is likely to catch it. If you are one of the people who go down with a bout of negative equity there are four likely scenarios.

1. You are able to meet your commitments; you have no need or intention of selling any of your assets in the next two years. This is the mildest form of the bug, and shouldn’t cost you a minute of sleep. If it happens to be a business arrangement – commercial property, buy-to-lets – a jittery lender might ask you to put up additional collateral. To such an impertinent request the appropriate answer is:” Get stuffed. No one put a gun to your head when you drew up the papers. No one coerced you into lending me more than prudence might suggest. You were motivated by the need to hit your sales target; your employer was motivated by pure greed. As long as I am meeting my payments I will entertain no further discussion of fresh protection for you.”

2. You were planning to sell soon. If this were not a forced position you would be well advised to re-consider your plans. Unless you are trading up, wait until the financial world turns the right way up again.

3. Your short-term fixed rate mortgage is coming to an end. You’ve borrowed more than your house is worth at 3.9% and they’ve lent you five and a half times your stated income without even verifying it. Once again, your lenders acted on the impulse of greed and the fear of losing out to the competition. So what do you do? The one do you can’t do is NOTHING. The option of putting your head under the bedclothes is not open to you. You must go out and meet the problem; don’t wait for it to come to you. Three to four months before your current arrangement finishes speak to a good mortgage broker. There are plenty of mediocre or downright bad mortgage brokers, and a few good ones. You want an Independent Financial Advisor – one who has access to the whole of the market, and not an advisor who is tied to just one company and its range of products. You need a person who can think laterally and will persevere until you have the best deal available. We have Howard; everyone should have a Howard. Over the next few months the banks and building societies will suddenly remember that they make their living by lending money. New products will become available.

But what if he can’t find you a suitable mortgage? Far be it from me to incite a mass movement for civil unrest but a short time on the Internet will reveal a very large number of people who have caught this strain of negative equity. More and more of them seem to have started fighting back. When lenders try to intimidate them they are saying in growing numbers ‘No! I can’t repay the mortgage and I won’t be forced into selling my home. You gave me this deal to entice me away from my previous lender because you wanted my business. You gambled on the property market continuing to rise… and you lost. I will not pay your gambling debts. I will continue to make my monthly payments. If you refuse to accept them I will pay them into my solicitor’s account, and when appropriate he will pay them into court.’’ This ploy seems to be enjoying some success at the moment and may result in forcing a complete change of attitude.

4. You can’t keep up the payments. There is no disgrace to this. The possible reasons are numerous.

• You lost your job
• You fear of losing your job
• You have kept your job but lost the large bonuses you used to receive
• Your business has slowed down
• Your mortgage rate has increased

Whatever the reason, you can’t afford it. Once again doing nothing is not an option.

Meet the problem before it meets you. Speak to your broker, or speak to a professional. Lenders really do not want to repossess properties that they would have to sell for less than the debt. Chances are that they will be amenable to a deal, an arrangement to receive some money until things improve.

I failed to foresee the last recession but I was one of the first to realise that financial weakness is a strong place from which to negotiate. I eliminated large chunks of debt by taking advantage of the difference between the borrowing and the ‘forced sale’ value of the properties in question.

Having negotiated large savings for myself I went on to sell that knowledge to other people in the same position. Just remember negative equity is a reality but it doesn’t have to be a bogeyman. Handled corrected it can be controlled and possibly made to work to your advantage.

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