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mulling over negative equity

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I’m worried about my house.

Well not exactly my house, which is fine. But the value of my house and the mortgage on it.

I knew full well when I bought my house that it was probably near the top of the market, but I slightly pushed that to the back of my mind for the following reasons:

  • prices in the area hadn’t moved for 2 years
  • negative equity is not a problem if you’re not planning on moving and can afford to pay the mortgage
  • it’s as important to buy when it’s right for your personal circumstances as the market

I disliked the flat that I was renting. I had enough money saved up / received in windfalls to mean that I had a 10% deposit plus fees plus a little extra for decorating. Rents were about the same as mortgage payments, so if I wanted to upgrade there would be no cashflow benefit in renting. It made sense to me to buy.

In return for my investment I have

  • a home that I really like
  • a mortgage of £87k to pay off (£500 a month for 30 years)
  • an asset whose market value is £80k and falling (slowly)

Yes, I can see what you’re saying. Financially has not necessarily been the best purchase so far.

With my rational self, I can see that a house is not a short term investment. In the long run it is likely that the house will increase in value - probably at the same rate (on average) as wages. Besides which, it doesn’t matter if it doesn’t because I don’t need the house to even stay the same in value to eventually pay off the mortgage. Although the house would have been cheaper if I’d waited, it’s much harder to get a mortgage than it was 18 months ago - I wouldn’t have a large enough deposit to get a good rate for example. At the time, the decision I made was reasonable. It might still turn out to be a mistake, but not one that I could reasonably have forseen in advance.

My irrational self however is more concerned that any future lack of income could eventually lead to complete bankruptcy (rather than just homelessness) because the house is in negative equity. As I have self-employment earnings and some savings, I’m exceedingly unlikely to qualify for any help with my mortgage payments should I lose my job. I’m also the type of person who likes to have plenty of options and so even though I want to stay in the house for the next few years I feel slightly trapped. On the cash flow question, my mortgage payment now is the same proportion of my take home pay as my rent used to be (wage inflation is an amazing thing).

I am wondering, somewhat tentatively, whether it’s a good idea to revisit the pay off the house vs save and invest argument. When I last did this, shortly after purchasing the house I endeed up slightly in favour of saving and investing. Now, some of the variables have changed - particularly my own comfort with my mortgage debt, which is just as valid an input as the relative investment returns.

In the next couple of days I’ll go through the figures and see how they stack up.

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4 comments for “mulling over negative equity”

  1. Please let us know what you decide! I’ve had this discussion with many people and my approach below doesn’t appear to be very popular with my peers.

    This recession has taught me a lot about my own risk tolerance. After much consideration, I decided to save a certain percentage into my retirement accounts, place the remainder into a decent yielding savings account, and temporarily cease paying extra towards my mortgage.

    I continue to contribute to my 401k since I get a tax break and a company match. In addition, I reduced the contributions to my index funds. These savings total a reasonable percentage that will hopefully allow me to retire somewhat early.

    In a recession, cash is king. It’s important for my emotional well-being to have enough cash to endure a long period of unemployment. What worries me is that this recession is affecting almost every sector and every country. Cash placed into stock funds or a house becomes illiquid.

    When the economy rebounds in a few of years, that cash can be applied towards mortgage debt. The difference between additonal payments now versus additional payments in 1-3 years does not appear too significant.

    Posted by J | January 6, 2009, 2:39 am
  2. This can be a nasty feeling, especially if you are concerned about losing your sources of income. You seem like a person who is pretty confident of your job, so this may not be a pressing issue.

    You have mentioned that you had earlier decided that savings and investments were the way to go.

    Unless the interest rates on your mortgage are rising, then I think you are on pretty okay ground for the time being.

    Posted by fathersez | January 7, 2009, 5:19 am

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