Buying a house is a major decision and a major milestone for most people, so it’s natural to worry about what could happen if the housing market crashes. People who are yet to get onto the property ladder often talk about wanting a crash to happen so they can buy their first home, but what happens if you’ve already bought a house?
Here’s our complete guide on what happens if you have a mortgage during a market crash.
Why does the housing market change?
There are a few different factors that affect housing prices.
House prices tend to change according to supply and demand, just like any other commodity. When there are more houses than people need, prices will drop. When there are too few houses for the number of people who want to buy houses, the prices will increase. This can be due to a lack of new houses being built, or increased demand from landlords. If landlords buy up all the houses to rent to people, it prevents a lot of people from ever being able to afford their own homes. The recent trend for short-term holiday lets, such as AirBnB, has made this problem worse.
Housing prices also reflect how much people are willing or able to pay. This means that if people are unable to get mortgages, some houses will not be sold for as much as the owner hopes. However, this is unlikely to affect the market as when the market is strong, people predict good house price appreciation, meaning that people will buy property to use as an investment.
What can cause a housing market crash?
When people can no longer afford to buy houses at an inflated price, the housing market can crash. This can happen when a recession hits, or when other economic factors cause issues. For example, if people are given more mortgage loans than they can afford to pay, this can risk a major crash.
What is a housing bubble?
A housing bubble is where prices are inflated due to a lot of factors. Usually, this is when supply is lower than demand, and people are able to purchase homes with a wide range of mortgage options. A housing bubble is a temporary event, and the bubble will eventually pop. However, housing bubbles are likely to last longer than other equity bubbles.
What is the real estate market cycle?
The real estate market goes through a boom and bust cycle, like a lot of financial markets do. When demand is high but supply is low, prices will be high, in a boom stage. During this time, developers will start building a new supply of houses in order to meet the demand. However, this generally happens after the peak of the demand, since houses take a long time to build. During this time, people may manage to move into existing homes.
Once the new houses are finished, this will increase supply, sometimes beyond the demand for new houses. This leads to a bust stage of the cycle, where houses are less expensive.
Unfortunately, it can be hard to predict exactly where in the boom and bust cycle we are. This is because lots of other factors affect it, for example how high demand gets, the price growth of the houses, consumer confidence, and mortgage availability, just to name a few.
When did the housing market last crash?
The most recent major housing market crash was in 2008. This is a famous incident, and one of the most major housing market crashes ever.
There were lots of factors leading to this market crash. One of the biggest contributing factors is that people were offered mortgages that they could not realistically afford to pay back. Some people even had the option to take out multiple mortgages that they could not afford. These lax lending standards meant that too much money was owed.
When people started defaulting on their mortgage loans, it caused a lot of turmoil in the financial markets. This unsettled the stock market and caused a global recession – known as the great recession – which many people are still recovering from to this day.
How can we prevent a housing crash?
There is not much that the average consumer can do to prevent a housing market downturn. It is however important for all lenders to avoid borrowing more money than they think they can pay back. Generally however, housing market issues are caused by bad lending standards from banks and mortgage providers. Another major factor is price inflation due to buy-to-let landlords, which is also something that most people cannot combat – though there are some options to follow legal routes to make sure that rental homes cannot be the majority of homes in an area. This is unfortunately not always successful or easy.
Rather than trying to prevent a housing market downturn, it is most important to just make sure that you are protected against the risks of the market crashing, and to make sure that you know what to do if this happens.
What happens to my mortgage if the market crashes?
If the housing market has a sharp downturn, your house could become worth less than you initially paid for it in today’s market. This is unfortunate, but it cannot be avoided.
It can be very disheartening to realize that you are paying more for a property than it is currently worth. This is common with a lot of purchases – maybe you bought a car that went on sale after you paid for it, or maybe a holiday dropped in price after you’d booked it. However, there’s no denying that it is even more disheartening when this happens on a major purchase such as a house.
Of course, if there is a minor downturn in the market, you might not notice the change in value too much. However, if there is a full crash in the housing market, it should be pretty noticeable – especially if you want to move and buy a different property.
Do I still have to pay my mortgage?
Yes, even if your house value drops due to a crash in the market, you still have to keep paying your mortgage. You agreed to buy the house at a certain set of real estate prices. Just because the house is now worth less, nothing changes, unless you can find a way to change the situation to become somewhat more favorable.
It’s important to remember to only ever take out a mortgage that you know you can afford to pay, for the entire duration of the mortgage. This is especially important if you have a mortgage where you get low introductory rates and then have to pay more further down the line – this kind of mortgage was common before the 2008 crash, and it contributed to the problem.
Will mortgage rates change in a housing market downturn?
The interest rates on your mortgage might change during a downturn in the housing market, or they might stay the same. This depends on what kind of interest rate you chose when you took out the mortgage – fixed rate mortgages or adjustable rate mortgages.
What about fixed rate mortgages?
Fixed rate mortgages are very simple – as it sounds like, this means that the interest rate is fixed and will not change, no matter what happens to the housing market or the general strength of the economy.
Fixed interest rates can be appealing because they mean that if the base interest rate rises above the rate you agreed on with the broker, you will be paying less than you might otherwise be paying. However, on a fixed rate you will end up paying the same even if the housing market crashes.
It is worth noting that most mortgage lenders will only offer fixed interest rates for a certain amount of time – usually between one and five years – after you take our your mortgage. After this, you would end up on a a variable rate for the interest on your mortgage.
What about variable rate mortgages?
Adjustable rate mortgages, or variable rate mortgages, are where the interest rate changes according to the market. The interest will be set by the base interest rate for your country. This means that during inflation, your interest will go up.
However, if the market crashes or if a recession hits, you will usually find that interest lowers. This means you could be paying much less in interest. During times of recession, a flexible interest value on your mortgage will often mean that you are paying a lot less than those on fixed rate mortgages.
Remember though, it can be hard to predict the market – even housing economists struggle to accurately predict the home price growth or downturn, which means that picking your interest type based on your predicted future of home prices and the national interest level is not always going to get the result you hope for.
What does it mean if my house goes underwater?
One term that is bandied around a lot is ‘underwater’. When a house goes underwater, this means that it is in negative equity. In simple terms, this is when the house is worth less than the remaining balance on the mortgage. Effectively, the house is a negative asset which will drain the finances of the person paying the mortgage, and leave them with less equity in the long term.
You are more likely to have your house go underwater if a recession happens early during the term of your mortgage. This is because the home prices are judged against how much you still have to pay on your mortgage, not against the original price that you bought it for. If you have almost paid off your mortgage, you will not be in negative equity – though you will still have list some value on your real estate investment.
Of course, a house going underwater does not just happen when the housing market crashes. It is also possible to have your house go underwater if your home suffers some kind of incident, such as fire, flood, or other natural disasters, and if you cannot get it covered through insurance. There are also some issues that will lower home prices in a specific area, such as if a neighbourhood has a rise in crime rate. However, it is most common to have houses go underwater when real estate markets crash, since far more houses will be affected at once.
Can I sell when my house is underwater?
If you want, you can choose to sell your house when it is underwater. This is called a short sale. However, you should be aware that you will struggle to get enough money for it to cover the remainder of your mortgage. This could mean that you are thrown into debt, or that you will still have to pay off the remainder of your mortgage over the remainder of the term length.
A lot of people suggest that if you can, you should wait before selling your house. If your home is underwater due to a crash in the real estate market, it is possible that there could be home price growth in the future. This could mean that if you hold on to the property and keep paying your mortgage, you could avoid housing property loses.
If you do sell your house when it is underwater and have debt remaining, you might find that you would struggle to get another mortgage, which can prevent you from buying a new house. This could happen even if your credit history was previously good. This can be a major consideration when you are looking at whether or not you should sell your house when it is underwater.
What about refinancing during a housing crash?
Interest percentages tend to drop during a recession or a housing crash – in terms of both the national rate and the rates that a mortgage lender is likely to offer.
When you refinance a home, your new interest rates would be in line with the national rate. This means that if you can refinance your home during a housing crash or a recession, you can often get lower interest rates. This can be a great way of saving money on your mortgage payments. In fact, you might even be able to get a fixed interest percentage which will stay in effect for a number of years. You could even find that as the housing market recovers, you might still be on a fixed interest percentage while the base interest rates increase.
However, you should be aware that it can be hard to get a remortgage loan offer from mortgage lenders during a recession or housing market downturn. This is because mortgage lenders will likely have higher mortgage lending standards during a recession, as they will want to reduce their risk of taking on borrowers who cannot afford to make their monthly payments. You will also find home loan lenders less likely to offer remortgaging offers the longer the housing crash continues, as this increases the risk that people won’t make their monthly payments.
You can usually find out whether or not you can get a remortgage offer by putting the necessary information for a mortgage quote into an online calculator, but you might need to contact a mortgage broker for advice and help. Lenders or brokers can also help make sure that you get a better deal than you might be able to by yourself,
What if I can no longer afford my mortgage?
One of the biggest concerns for people is whether or not they will be able to afford their mortgage during a recession or housing crash. This is sadly a very real concern – a lot of people have their wages dropped during a recession, or they might lose their jobs. It can also be hard to cope with other costs during a housing market downturn, such as medical costs, car payments, and food costs.
If you think you may not be able to afford your mortgage payment every month, there are a few ways you can look at changing your financial situation in order to keep making your monthly mortgage payments. Ideally, you should have a plan for this kind of issue before you borrow money to buy a house, but it is never too late to start improving your financial footing.
Try to cut expenses
One of the first ways to try to make sure you can afford your monthly payments is by cutting down your other expenses. This can make a surprising difference in your funds, letting you put more into your mortgage payments.
Sticking to a rigid budget can be difficult, but it is important to make sure that you have enough money put aside for your monthly payments. One way to do this is to set yourself a percentage of your income to spend on bills, another amount of savings, and then have the remainder for discretionary purposes. Obviously this means that if you are struggling to pay for your home loan, you can put the majority of your income might have to go towards repayments, while you budget the rest.
You can also try to cut down some of your expenses by looking at cheaper options. This might include things such as:
- Eat out and get takeaway less often and cook your own food instead
- Limit your spending on unnecessary items
- Buy second hand clothes and furniture
- Avoid name-brand items – though non brand name items can be lower quality, it’s possible to find reviews to see which name brand items are significantly better than the cheaper options
- Try to travel less. Where possible, try to car pool in order to share fuel costs
- Cut down on the amount of meat you have in your diet
Try to get more income
Another way to try to make sure that you can afford your loan payments is to try to increase your income. This might sound very difficult, but there are some ways that you can get more money into your finances.
If you have any significant savings, you could look at making sure that they are in the best type of savings account. While changing to a savings account with a higher interest percentage will not usually have a huge impact on your monthly income, you can still use this to bolster your income a bit – every little bit is an improvement.
You could also look at trying to increase your income through work. If you have a job where advancement is possible, you could look at whether there is any possibility for getting a promotion or a raise. Of course, this can be a difficult topic to broach with your boss or supervisor, especially if you are already worried about how you will cover your home loan payments.
For a bit of extra income, you could look at freelance work in your downtime. There are some freelance roles that can be done from the comfort of your own home, at your own pace. Alternatively, you could look at getting a second job. You can often find service jobs, such as waiting tables or working as a bartender, which can be done in the evenings – this is helpful if you work an office job during usual business hours.
Fund out if you can take a payment holiday
It might be possible for you to get a payment holiday if you are unable to pay your mortgage rates. This typically means that you can stop making your monthly repayments for one or two months. However, you cannot always get a payment holiday, and you can only have a certain number of payment holidays each year. You might find you are more likely to get offered this if you have a stellar credit score.
Sell the house
Another option – possibly the final option – is to sell your house. This can be very upsetting for people who can no longer afford their forever home. This can help you settle off the total debt left on your loan. Of course, as people involved in home sales will tell you, it is hard to guarantee that you will get the house sold at a sufficiently high cost to pay off your debt. The price you get for your home will depend entirely on today’s housing market, the average home prices in your area, as well as homebuyer demand. Home values can change quickly in a crash, so it is worth keeping an eye on the prices and the predictions from housing economists and experts to avoid a sharp fall in home prices just before you sell your home.
What happens if I stop paying my mortgage?
If you stop paying your repayments, you are at risk of losing your home in the near future. As you signed a contract to say that you would pay your lender back, you will get in trouble for breaking your side of the deal. This could lead to a foreclosure, where the bank or lender repossesses your home. Once this has started, there is not much you can do to change it.
Will a foreclosure affect my credit rating?
A foreclosure will definitely change your credit scores with all the major agencies. Even if you previously had a good credit score, you can find that this goes down. A foreclosure will stay on your credit rating for the foreseeable future – usually at least a year, but it could be a few years.
Can I buy another house after forclosing?
Yes, you can buy another house after a foreclosure. However, you will probably find it hard to get a new loan for a new property. This is because lenders will not want to risk that you could fail to pay your new loan off.
Will the market recover?
It is entirely possible that the market will recover, and home prices will go up with home price growth, rising interest rates, and mortgage rates. However, it can be hard to predict this.
How long will it take for the real estate market to recover?
The housing market usually takes a longer time to recover than other financial issues. This means that home prices could be down for multiple years. This means it is hard to say when exactly the market would recover.
How can I protect myself against a housing market crash?
There are not many ways that you can protect against a crash, as even a chief economist would have problems predicting when it will happen and how bad it will be.
One way to protect yourself is to make sure you have a lot of savings. As mentioned above, there are many ways to try to save some money – money that will become essential if you cannot afford your payments. You should always aim to have enough in an emergency fund to cover multiple month’s worth of payments, including your home loan and other bills.
Don’t put everything into real estate
If you are worried that there might be a crash, you can split your assets and invest them in other options too, such as stocks or shares, savings accounts, or other investments. Of course, you should always consult a professional before looking at how to invest your money. Splitting your assets this ways can help protect them, though if home prices drop due to a recession, you’ll also find the other investments will drop in value too.
Is a longer or shorter term length preferable if the housing market crashes?
When home prices and reals estate prices drop, you ideally want to have less of your original borrowing amount left to pay off. This is because you will need to consider the home prices against the amount you still have yet to pay,
During a recession, home prices will be lower, making home affordability better, which is worse if you already own a home. However, if you have paid off most of your home debt, then you would have simply bought something which has dropped in price.
If you own a house that is worth less than what you still have to pay, then this will mean that you cannot sell the home and cover your debt – this is negative home equity. This is most common if you still have a longer term length left. Negative home equity follows a boom and bust cycle, so there is a fair chance that the home prices will increase again – and if they do, then you at least may manage to get a decent price for your home at a later point.
Is a crash a good time to buy properties?
A crash could be a good time to buy properties. bidding wars for properties will be much less likely, meaning you can usually buy properties at reduced home prices.
However, any investment is risky. You should make sure that the house is what you want. You might also find that, as happened in the great recession, prices will still fluctuate and may drop further. This means that if you buy at the wrong time, you might not be getting the best deal on your property. It is always worth consulting an expert in home sales before you start investing in real estate.
Can I be guaranteed that the price will go up?
No, there is never a guarantee that the housing market will recover. Of course, if you want to avoid high inflation due to high demand, you could get an expert’s assessment of today’s housing market, mortgage rates, and interest offers from lenders.
Historically the real estate field has always recovered even after major recessions and major downturns, However, you should always be safe and research what to do with your money before you start buying a house or any other major investment. Not all properties will recover after every crash.
A crash in the housing market would mean a lot of significant issues for a lot of people. If you think you can continue with your home borrowing debt regardless then that helps protect you, because you should keep paying for your house even if home values drop. If not, you should look into getting advice and trying to find out which way the wind is blowing before buying – if it is predicted that home values will drop shortly after you buy your home, you might want to wait. However, remember that it is very hard for anyone, even a chief economist, to predict home values, so make sure that you get professional advice. If you feel that today’s market is good enough, you might not want to wait, if that allows you to get into your dream home.
Ultimately, when the market drops, you still have to keep paying your debts, but there are some ways to look at improving your finances to ensure that you don’t lose your home. Selling your home during a housing crash is usually seen as a last resort.