Taking the pain out of trading up in a time of eroded equity

Q: We’ve out-grown our present property and would like to trade up. How realistic is this given the market?

It is an expensive housing market for almost everyone, FTBs and second-time buyers alike. Couple this with the toughest economic conditions in a generation and it would have most of us running for the hills if we had a choice.

The problem for existing homeowners trading up isn’t necessarily the process of obtaining a mortgage; rather the bigger issue is eroded equity from their current property.

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Research from HSBC stated that as many as 360,000 buyers who bought their first homes at the peak of the housing boom in 2007 could be stuck in them for years to come.

This is due to the fact that property hasn’t appreciated in value in the last few years and in some cases worth less than the original purchase figure. This could lead to negative equity.

A lot depends on the amount of equity in your existing property and the relative price of the home you are looking to buy.

If neither your existing property, nor the place you are looking to buy, has a demanding high loan-to-value (LTV) and your financial situation is good, then your options are much wider.

It might be possible to “port” your existing mortgage to the new property but this will be subject to meeting your lender’s underwriting criteria.

This doesn’t mean your lender will lend to you again, but they will give you the same mortgage product as you already have. Bear in mind there is a higher premium charged for high LTV deals, with a 90 per cent LTV mortgage typically charging about 1.5 per cent– 2.5 per cent more than an equivalent product at 75 per cent LTV.

Alternatively, you could look into renting out your existing home for a while and renting somewhere bigger until you are no longer in negative equity and can sell up and buy elsewhere.

Speak to an independent mortgage broker. It’s always worth it and you will more than likely be given more of an insight into your options.

Q: How can we make sure our low tracker rate stays low?

There are fears amongst tracker rate customers that they will end up paying more than they expected, or can afford, leaving people struggling to make ends meet.

Even if you are content on your lender’s standard variable rate and are fortunate to have 25 per cent or more equity within your property, things can still change. Only recently, HBOS group announced that it plans to increase its SVR with effect from May 2012. Given this fact you really should consider your options sooner rather than later.

The Bank of England has again held Base Rate at 0.5 per cent for the 36 month in a row. So, whilst those on tracker rates can relax again this month those with a variable rate product or a discounted rate product could see their payments increase.

The solution could be to re-mortgage. Even if you have less than 25 per cent equity within your property, you may still be able to benefit from a re-mortgage. Finding the right re-mortgage deal will require a fair amount of research, to compare current against available options, but it’s worth considering if you are concerned about rates rising.

The Council of Mortgage Lenders estimated there were 830,000 households trapped in negative equity last year. Many more are also effectively trapped in low equity, unable to re-mortgage due to a paucity of five and 10 per cent mortgage deposits.

However startling these statistics are my advice would be to take your concerns and queries to a professional like an independent mortgage adviser who can discuss your options and present a solution right for your situation.

Franz Muelthaler is mortgage adviser at Wakefield and Dewsbury-based Holroyd Miller. Tel: 01924 465671.