You can avoid expensive mortgages by saving as little as £3 a day; equivalent to the cost of a daily cappuccino...
As house prices continue to decline, many of you homeowners could face more than paper-losses on your properties.
Falling house prices means that even those of you who are diligent in paying your mortgage may not meet your mortgage lenders' stringent requirements when your current mortgage deal ends.
Impartial money website Fool.co.uk has urged you homeowners to take immediate action as mortgage lenders continue to restrict their best mortgages to those of you whose mortgages are small compared to the value of your properties.
The cut-off point is typically a mortgage with a Loan-to-Value (LTV) of 90%. In other words, if you are borrowing more than 90% of the value of a property, then you are forced to go on to Standard Variable Rate mortgages.
- What a fall in house prices mean
If house prices remain flat, if you are a homeowner that started with a 100%
mortgage, you will reduce your loan to 90% of the property value after five years. On a typical £200,000
mortgage at 5.5%, the loan will shrink to £178,543 after 60 monthly payments of £1,228.
But if property prices fall 5%, the outstanding loans will still be 93% of the value of your home after five years, which is above the 90% threshold for better mortgage deals. That's because even though you have been paying off your mortgage steadily, the value of the property has dropped to £190,000. It will take seven years to reduce the loan to 90% of the property value.
If house prices fall 10%, it will take eight years to reach 90% LTV, and 11 years if property values slump 20%.
- How to put yourself in control
A 5% drop in house prices means that you must cut the outstanding
mortgage to £171,000 within 5 years to comply with the 90% LTV criteria.
Overpaying by £109 a month, or £3 a day, is all it takes to achieve this. And it's not hard to save £3 a day if you forego a fancy coffee every day!
If house prices fall 10%, you will need to overpay by £240 a month. But if property prices fall 20%, you must overpay by £500 a month.
David Kuo, Head of Personal Finance at Fool.co.uk, said:
"The toxic cocktail of easing property prices and tougher lending criteria means that homeowners must act now to avoid ugly mortgage deals when their current arrangements end.
"A modest fall in house prices means that small overpayments of £3 a day will be enough to reduce the loan-to value to 90%. This is equivalent to giving up a store-bought cappuccino every day.
"But if prices fall by as much as 20%, then extreme savings will be required. Extreme circumstances require extreme measures. So total up what you need to cover bare essentials, and cut out everything else.
"That's right. Extreme savings are required when times are hard. But hard times come and go. If your resolve weakens, just ask yourself if it's more relaxing paying to watch repeats on cable television or knowing that you can afford to pay your mortgage."
So, despite how tough things are financially, you can do some things to help yourself.It just takes some prioritising!
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