Homeowners have had financial pressure due to higher interest rates. Those not on fixed rate mortgages have been dealing with rising repayments. Those that did secure a fixed rate are likely to face more expensive borrowing when their mortgage term ends. This is especially true for those that obtained two-year fixed mortgages ending this year. Those deals were offered when interest rates were historically low, but ending this year will make them disappear and leave homeowners shopping from interest rates higher than in over a decade.

Another threat to homeowners is negative equity. This is when a homeowner’s property value declines below the level of debt outstanding on the property. The reason this is a threat is because it could keep a homeowner from having access to a remortgage. The homeowner would be required to not only make payments against the debt to bring it into positive equity, but possibly more payment would be required to bring the property equity into a favorable loan to value ratio or LTV.

The LTV is one criterion used by lenders to determine what remortgages will be offered to a homeowner. The higher the value to the loan, the better the offer as it involves less risk for the lender.

Going into negative equity is always a threat to those homeowners having lacked the time to pay down their debt. It is usually the case that the longer a homeowner has been paying on their mortgage, the more equity that has been built into the property. Equity is at the basic level, the amount the homeowner owns of the property while the debt could be seen as the amount the lender owns of the property. As repayments are made, the ownership level of the property grows for the homeowner.

Another way equity grows is when the property value increases. This is why it is important for home buyers to consider the future value of a property when they are making an investment in buying a house. Of course, property value also helps to determine what a home buyer will initially pay for a property. 

When the housing market in an area is showing strong demand and house prices are rising, even those homes not on the market will gain value due to the demand from home buyers. Homes in a particular area can have more financial value than in another area, such as is seen in popular holiday spots or large cities.

Just as demand in the market can build value and therefore equity, so can a loss of demand cause a decline in value. 

The housing market has so far shown resilience despite rising interest rates. However, in May it was reported there was zero growth in the average house price which could signal a decline is on the way. It’s even more likely now that there is strong opinion there will be another 0.5% rate hike by the Bank of England’s Monetary Policy Committee during their August meeting. The resulting 5.5% standard base interest rate could be the level at which the housing market fails to keep home buyers. 

Not only will the economy be impacted by a weaker housing market, so will all businesses offering goods and services to those setting up new homes, furnishing them, upgrading or improving them, and moving to them. As mentioned, another victim of a declining housing market is the homeowner. Losing property value is never a good thing, even if there is an expected recovery period off on the horizon. 

Unfortunately, that recovery could be years away as of now and homeowners without enough wiggle room in their equity level to allow the impact of a decline in property values could become prisoner to their lender’s standard variable rate (SVR) and face affordability issues.

When a mortgage term ends, the homeowner can allow their lender to move them to their SVR or the homeowner could remortgage. The interest rate found with a remortgage could be much cheaper and allow the homeowner to save money by denying a SVR. The remortgage could also offer a fixed rate and shield the homeowner’s budget against further increases which in turn saves them more money.

Shopping for a remortgage is highly encouraged by experts when interest rates are rising. It allows a homeowner to secure an interest rate they choose rather than paying more than necessary as rates rise. However, if the homeowner falls into negative equity, they will be unable to remortgage, and will be moved to the lender’s SVR and be a prisoner to that rising and normally higher rate until negative equity is reversed.

Homeowners could get an estimate of their current home value by searching websites with property listings. Looking at their own property address, as well as neighboring properties, can give insight as to the probable level of value. Of course, other factors could impact the value such as improvements, the energy efficiency of the home, and more, but an estimate is enough to help a homeowner get an estimate and determine how close they could be to entering negative equity. 

There is currently an expectation of house prices declining in the UK by double digits by the end of the year and then more so next year. A turnaround in the market is forecasted for late 2025. Such a forecast is not to be overlooked and should hasten the efforts of homeowners considering a remortgage. It might be a good strategy to shop for a remortgage deal while one can, but also before rates rise further, which could happen in a few weeks from now.