Negative equity occurs when a property is worth less than the mortgage used to buy it. Being in negative equity makes moving and remortgaging much harder.
An estimated 500,000 properties in the UK are in negative equity, with some areas more affected by the house price falls which are the usual cause.
You’re more at risk of negative equity if you have an interest-only mortgage
With a repayment mortgage, you’re paying down the loan every month as well as the interest, so your debt is always reducing. This means you can withstand some fall in value. With an interest-only mortgage, you’re not reducing the debt, only paying off the interest accrued each month. If property prices suddenly dip, you could fall into negative equity.
For example, if you a house for £200,000 with a £50,000 deposit and a £150,000 mortgage and the property is suddenly worth only £140,000, you’re in negative equity.
If that same house falls in value to £160,000, you’re not in negative equity because it’s still worth more than your mortgage.
Am I in negative equity?
You could be in negative equity without knowing it. To find out, you should contact your lender or look at a mortgage statement to find out how much you owe on your home loan.
Once you know this figure, ask an estate agent to value the property. If the valuation figure is more than your outstanding balance, you’re not in negative equity. If your home is worth less than your debt, you are in negative equity.
Is negative equity a big problem?
It’s a problem if you want to move because the sale of the property won’t pay off your outstanding mortgage. If you have savings that can make up the difference, then you’ll probably have to use them on it.
Even if you’re not planning to move, negative equity can prevent you from remortgaging. If you’re looking to move to a cheaper rate, this can be very frustrating, especially if you move onto the lender’s standard variable rate.
Can you still move if you have negative equity?
You can still move, but there may be some barriers. You have to look at:
– how much negative equity you’re in
– how much the property you want to buy is worth
– whether or not you’re up to date with your current mortgage, and
– how much of a deposit you can gather for the new place
You should talk to your lender to see if they can help. Some lenders – although not many – offer negative equity mortgages.
Negative equity mortgages
With this type of mortgage you can transfer the debt to your new property, but you will still need to pay a deposit.
A negative equity mortgage will help you to move, especially if you can’t wait for prices to rise again. However, you might face early repayment charges on your current mortgage. Plus, your new mortgage might have higher interest rates or your lender might ask for a bigger deposit than usual.
You might be able to reduce your negative equity
You could try to reduce your negative equity by making overpayments on your home loan.
Some mortgages allow you to make unlimited overpayments each year without incurring early repayment charges while others limit you to a percentage of your outstanding debt each year. For example, if you owe £150,000 on your mortgage, you can only pay an extra £15,000 in that calendar year before you’ll face charges.
Work out how much extra you can afford to pay each month and how much of an impact these payments will have. Use an overpayment calculator to work out how long it could take to pay off your negative equity.
Letting your property could be a good solution
If you really need to move and you’re not in a position to sell, then letting your property out and renting another could work well, as long as your lender agrees. You’ll also need a different insurance product.
You’ll stay with your existing mortgage, but your lender might impose Consent to Let fees or bump up your interest rate a bit.
Sometimes, it’s just a case of waiting
If you’re paying down your mortgage each month – possibly with overpayments – then eventually you’ll eat away at the negative equity, especially if house prices hold steady.
Even better, values might rise again, so keep checking your local area and don’t despair.
