What does having negative equity mean, and what can you do if you find yourself in this situation?
With a generally strong property market we might have put the concept of negative equity to the back of our minds. But for homeowners with mortgages, a fall in property prices brings a risk of negative equity.
Here are some common questions about negative equity.
WHAT IS NEGATIVE EQUITY?
Usually, homeowners own (positive) equity in their property. Negative equity occurs when your property is worth less than the outstanding amount you owe on your mortgage.
For example, imagine you bought a house for £200,000 with a £10,000 deposit and a £190,000 mortgage. But then the value of your house falls to £180,000.
You now have negative equity of £10,000.
If you wanted to move house or remortgage, you’d need to find a way to cover that shortfall – which could be difficult if you don’t have enough savings.
HOW DOES NEGATIVE EQUITY HAPPEN?
There are a few ways in which you might end up with negative equity:
- If you bought your property at the height of the market, just before prices started to fall.
- If you only put down a small deposit when you bought your property. This means that if prices fall, you’ll have a high loan-to-value (LTV) ratio, and so negative equity could happen more easily.
- If you took out an interest-only mortgage. This means that you’re not repaying any of the actual amount you borrowed (the capital), so if prices fall you could end up owing more than your home is worth.
HOW DO YOU KNOW IF YOU HAVE NEGATIVE EQUITY?
If you’re worried that your property might be worth less than your mortgage, you can ask a local estate agent for a valuation. They’ll send someone out to value your property and give you an up-to-date figure.
You could also look at websites like Zoopla or Rightmove to get an idea of how much similar properties in your area have recently sold for.
IS NEGATIVE EQUITY A PROBLEM?
If you have plans to move house or remortgage, negative equity can make it difficult – but it’s not impossible.
However, if you are planning to stay in your home for many more years, you could be in negative equity without it affecting your daily life. Negative equity becomes more of a problem if you want to sell your home, or if your mortgage deal is coming to an end.
If you’re struggling to keep up with your mortgage repayments, negative equity can make it harder to sell your property and move somewhere more affordable.
CAN YOU SELL YOUR HOME WITH NEGATIVE EQUITY?
If you sell your home for less than you owe your mortgage provider, you will need to have another way to repay the remaining amount.
Alternatively, you would need to find a buyer who’s willing to pay the amount you owe on your mortgage, even though they’re technically paying more than your property is worth.
WHAT ARE YOUR OPTIONS IF YOU HAVE NEGATIVE EQUITY?
1. Wait it out
This is probably the simplest option, but it might not be possible if you need to move for work or family reasons.
If you don’t plan on selling or remortgaging in the near future, you could wait until your property has increased in value again. In time, your equity position will improve as your mortgage balance decreases and your property value hopefully increases.
2. Make early repayments
You could look into making overpayments to start reducing the negative equity. This will reduce the amount you owe and so lower your LTV ratio, which could make it easier to sell your property if you need to in the future.
3. Get a negative equity mortgage
In rare instances, some mortgage providers may allow you to move home and carry over your negative equity to the new property. You’ll need a deposit for the new property and will lose any money you had paid against your existing home.
4. Make home improvements
A further way to reduce your negative equity position is to increase the value of your home, so that your mortgage accounts for a smaller percentage of the value. You might be able to do this by undertaking home improvements if your budget allows.
