Home equity is something most people look forward to as they pay down their mortgages. For many, this is their more valuable asset. Equity builds over time as you pay down the mortgage, your home’s value increases (due to changes in the market), or you make improvements that add value.
In some situations, it’s possible to have negative equity on your property. This can make it difficult to sell the home or refinance it.
We’ve created this short to explain what negative equity is and what you can do about it.
What is Negative Equity?
A property has negative equity if it’s worth less than the mortgage that’s on it. The issue usually occurs when the real estate market causes property prices to fall.
Here’s an example. Let’s say you bought a property for £200,000, and your mortgage was for £130,000, and the property is now worth £100,000. Your home would now be in negative equity.
On the other hand, if you bought the home for £200,000, and your mortgage was for £130,000, and the home is now worth £300,000, the property would not be in negative equity.
In the UK, it’s estimated that about 500,000 properties are in negative equity; however, some areas may be more affected than others. It all depends on the real estate markets in those areas.
How Do You Know If You’re in Negative Equity?
You may not know for sure whether you’re in negative equity. So, it’s best to check your mortgage statement or contact the lender to find out how much you owe.
The next step is to ask a local real estate agent to value your home, or you can hire a surveyor to do a valuation. Keep in mind that the surveyor will charge for their services.
If you find the property is below what you owe, then you’re in negative equity.
Problems That Come with Negative Equity
Negative equity can be a problem if you’re trying to sell your home. Unless you have savings to repay the difference between the value of your property and the mortgage, it can be challenging to move.
It can also be a problem to refinance your home with a new mortgage, especially if you’d like to save money by getting a fixed rate or a cheaper deal.
Most lenders will not allow their customers with negative equity to switch to a new mortgage deal when their existing mortgage ends. Instead, the customers are normally moved onto the lender’s standard variable rate (SVR). In that case, the mortgage rates are higher, which means your monthly repayment is also higher.
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Does Negative Equity Mean You’ll Lose Your Home?
No, being in negative equity doesn’t mean you’ll lose your home. However, your property could be repossessed if you fail to make monthly mortgage payments. As long as you pay your monthly mortgage, you won’t lose your home.
Moving House If You’re in Negative Equity
Moving house is possible when you’re in negative equity; however, how easy it is to move depends on the following factors:
- How much negative equity you have
- The value of the property you want to move to
- If you’re current with your existing mortgage repayments
- How much of a deposit you’re able to raise for the new property
If you are in a negative equity position and need to move, the first step you can take is to talk with your lender. They can tell you whether they can provide any assistance. For instance, a few lenders may offer a “negative equity mortgage.”
A negative equity mortgage allows you to transfer your negative equity to the new property; however, you’re still expected to pay a down payment on the new property.
Pros & Cons of Negative Equity Mortgages
- You can still move without having to pay off the negative equity on your current mortgage. This can be beneficial if you need to move for work or family situations and you’re not able to put the move off.
- You may have to pay early repayment charges on your existing mortgage.
- There may be extra fees and charges, plus the new mortgage may have a higher interest rate than your current mortgage.
- Very few lenders off negative equity mortgages.
How to Reduce Negative Equity
When possible, it’s best to try to reduce the negative equity by overpaying your current mortgage. But first, it’s important to see if your mortgage allows you to make overpayments. If so, you need to see how much you can overpay before you get an early repayment charge.
Next, figure out how much extra you can afford to pay every month or as a one-off. You can use an online mortgage repayment calculator such as the one offered by MoneySavingExpert. The calculator will show you how much difference your extra payments can make.
You can also find other online mortgage calculators offered by mortgage brokers and lenders.
Renting Out Your Home
Another consideration is to rent out your home if your lender agrees to this. In that case, you’d keep the existing mortgage, though it’s necessary to gain permission from your lender. You may need to pay a higher interest rate and/or an annual “Consent to Let” fee.
You’ll also have to let your home insurer know you’re renting out your home.
How to Prepare for an Interest Rate Increase
When interest rates rise, it can be nerve-racking. You need to make sure you’ll be able to afford your mortgage payments with the interest rate hike.
This is extremely important if you’re in a negative equity situation. Being in this position during an interest rate increase can make it more challenging to make mortgage payments. If you fail to make the payments, there’s a higher chance of your home being repossessed.
Summing It Up
Being in negative equity can be challenging, but you still have options. It’s important to talk with your lender to get advice on how to change this situation. So, don’t give up!
Frequently Asked Questions
Can I avoid Negative Equity when purchasing a property?
While it’s challenging to completely avoid Negative Equity, making a substantial down payment and carefully monitoring the real estate market can reduce your risk.
Is refinancing an effective solution for Negative Equity?
Refinancing can be a viable option if you can secure a lower interest rate, which may reduce your monthly payments and help you recover from Negative Equity faster.
What should I do if my car is in Negative Equity, and I want to trade it in?
When trading in a car with Negative Equity, be prepared to cover the shortfall or consider rolling it into the new car loan, although this is not always advisable.
Are there government programs to assist with Negative Equity on homes?
Some government programs may offer assistance to homeowners facing Negative Equity, so it’s worth exploring these options.
How does Negative Equity affect my credit score?
Negative Equity itself doesn’t directly impact your credit score, but if it leads to missed payments or default, your credit score may suffer.
Can Negative Equity be a long-term problem?
Negative Equity can be a short-term challenge, but with proactive financial management, you can work your way out of it over time.