FOOL'S EYE VIEW
Don't Be a Victim of Falling House Prices

By Jane Mack (TMFJane)
December 17, 2002

About ten years ago some friends of mine went through a divorce. They were both earning a fair bit of money at the time so when it came to divvying up the spoils of their comparatively short six-year marriage, in theory, it wasn't going to be too hard. Except for the little question of the family home.

Their mortgage was for £120,000, a sum that was easily affordable between them although it wasn't one that they could manage individually. It was a huge amount at the time -- and still is, to be honest, although it wouldn't be in certain parts of the country these days. Their main problem was that the value of the house had fallen to about £95,000 so, understandably, neither of them actually wanted to buy the other out. And, yet, if they sold up, they wouldn't have any marital assets to divvy up -- they'd even end up owing money.

If you're under 30 you probably won't have encountered the joys of 'negative equity', although you'll, no doubt, have heard of the dreaded phrase that was so frequently bandied about at the beginning of the Nineties. It's certainly an awful phrase if you're a victim of it.

Put it this way, it's fine if you want to stay in your home and if you can afford to pay the mortgage but if you want to sell up and the value of your home has dropped below the amount of money you've borrowed, then the word 'trapped' springs to mind.

Depending on where you live, house prices have supposedly risen by well over 20% in the last 12 months so, if you bought your home at least a year ago, you've possibly got some leeway. If interest rates don't go up, that is.

But, if you've overstretched yourself with your mortgage then now might be the time to sort it out -- before it's too late.

Of course, no-one can predict the market, least of all the so-called experts out there who so frequently get it wrong. But, just in case their current predictions that house prices are falling are correct, then now is probably a good time to think about doing things such re-arranging your mortgage and, if you can, overpaying so that you have a cushion in case things go a bit pear-shaped.

Consider fixing the interest rate for the next couple of years or so to ensure that you know to the penny what you have to pay each month. If you can spare a little more each month then throw it at your mortgage so that you can whittle away at the capital. If you can find the right sort of re-mortgage you'll at least have the security of knowing that you can take a payment holiday if you really need to. Besides, it'll increase your equity and it will also mean you won't pay so much in interest over the term of the loan.

If all the bad news comes to pass, the other trick is to sit it out. Yes, you'll be stuck for a while -- maybe even a long while. But posting the keys to your home through the letterbox of your mortgage lender is not the answer as many people found to their cost back in the early Nineties. For some there was no alternative but I'm willing to bet that there are people out there who wish they hadn't panicked at the time.

My friends had the patience to sit it out -- she stayed in the house and got a lodger to help pay the mortgage while he rented elsewhere. They sold up two years later for the same amount at the mortgage so they didn't lose out financially.

However, now that they're friends again, they're a bit annoyed at the thought that, if they'd somehow managed to hang on to it, they'd now be sitting on a tidy £200,000 of equity.

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