Different mortgage lenders deal with a fall in value differently, so it’s important to understand how any loan you apply for works.
With some mortgage lenders, the amount you owe will fall if the value of your home falls. Mortgage lenders who take this approach will share any fall in value, in the same way that they share any increase.
Example 2 – The mortgage lender shares any fall in value
Remember, Adam bought a house for £150,000 using an equity loan of £18,750 from his mortgage lender (12.5% of the property’s value).
Suppose the value of the house falls by 5% when he decides to sell his home. It is now worth £142,500. What does he owe the mortgage lender? Because his mortgage lender is sharing any fall, what Adam owes is based on the new value of the property. He originally borrowed 12.5% of the property’s value so he now owes 12.5% of £142,500, which is £17,812.50.
That’s £937.50 less than he originally borrowed.
Other mortgage lenders won’t share a fall in value, although they will take a share of any increase, so the amount you owe them on the equity loan will never fall below the amount you originally borrowed.
Example 3 – The mortgage lender doesn’t share any fall in value
If Adam’s equity loan from his lender worked like this, then if prices fall he will still owe the lender the amount he originally borrowed – in this case £18,750.
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2 comments:
I am a Homebuy Broker -we work with several Homebuy Agents. If you buy 25% of a property then of course - if the property price falls then so does the percentage that you have mortgaged. That's pure common sense -indeed in some parts of the Country prices may well fall. But that does not make Homebuy a bad concept. If you look at any graph on property prices over the past 100 years there is only one direction that they have gone. UP!
Hi,
Thanks for your comments.
It's true that the rates have gone up, but these articles are to explain the difference between various options available in homebuy.
Though the prices have increased in past years, it does not guarantee that it will continue to do so in the future as well. One should be cautious about such falls.
Thanks,
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