Lloyds launches negative equity mortgage

Lloyds Banking Group has become the latest lender to offer negative equity mortgage loans to help existing borrowers trapped in negative equity to move home.

The deal is targeted at homeowners who need to move house but are unable to do so because of low or negative equity. Negative equity mortgages allow people to move house even if they owe more than their current home is worth.

Lloyds’ scheme allows existing customers who are in negative equity of up to 120 per cent loan-to-value to move to a property of the same value, buy a bigger home or downsize.

However, it does not permit any additional borrowing to be taken out. Borrowers looking to purchase a more expensive property will have to use their own funds.

Nationwide Building Society launched a similar scheme in 2009. The building society allows existing customers who find themselves trapped in negative equity to obtain a new loan of up to 95 per cent of a property, and also carry over up to 25 per cent of the loss being incurred on their existing property because of the drop in its value.

Many banks and building societies already offer negative equity loans to existing customers, but only on a case-by-case basis and they are often reluctant to publicise the deals.

Lloyds’ scheme allows customers who have a portable mortgage to keep their current rate, attractive for those currently on a low rate. However, customers on the bank’s cheap standard variable rate of 2.5 per cent, which is not portable, will have to switch to one of the bank’s current mortgage deals at a higher cost. This includes a two-year fixed-rate mortgage at 4.79 per cent with a £999 fee, or a three-year fixed-rate at 5.69 per cent with no fee.

“The Lloyds’ scheme will be welcomed by existing customers who want to move, for whatever reason,” said Melanie Bien, director of Private Finance, the mortgage broker. “Lloyds are being flexible and treating customers fairly, particularly as they can port their existing mortgage rather than be forced to take out a higher rate.”

David Hollingworth of London & Country said although the product was niche, it offered a new option to existing borrowers that could be “invaluable” where a move is a necessity, for example a relocation.

Someone wanting to move from a £110,000 house with a mortgage of £130,000, would currently be in negative equity with a 118 per cent loan-to-value. Under Lloyds’ scheme, the homeowner could move to a new property worth £120,000, providing they paid an additional deposit of £10,000, reducing their loan-to-value to 108 per cent.

The deal is currently only available direct from Lloyds.