What to do about negative equity: Know your options
Negative equity means the value of your home is less than the amount you still owe on your mortgage, making it hard to remortgage or move house. Fortunately, you have a couple of options when it comes to finding an exit route.
The level of equity you hold in your property can have a big impact on your future finances, and your ability to move up the property ladder.
In basic terms, the equity you own in a property is how much of the property you actually own, mortgage-free. It is worked out as the difference between your property’s value overall and how much you still owe on your mortgage.
Let’s say you buy a house for £200,000 with a £20,000 deposit and a £180,000 mortgage. At this point you have £20,000 of equity in the property. The idea is that over time as you pay off the mortgage and (hopefully) your home increases in value, the amount of equity you own will go up.
» MORE: What is house equity?
What is negative equity?
Negative equity means that you owe more on your outstanding mortgage than you would be able to raise by selling your property.
It can affect borrowers who only have a limited amount of equity in their home when house prices fall.
So in our example above, if the property’s value drops to £170,000, you will be in negative equity as the outstanding mortgage is higher than its value.
What happens when you are in negative equity?
Being in negative equity can cause you problems. For example, you may struggle to remortgage. Lenders won’t offer you a loan above a maximum of 95% of the value of the property, so you would need to make up the difference yourself to switch to another deal. The inability to remortgage can be costly as once your initial fixed or variable rate ends, you’ll move onto your lender’s standard variable rate (SVR). These are always higher, which means that the size of your monthly repayment will jump too.
Negative equity can also act as a hurdle if you want to move house, as the money you raise from the sale won’t be enough to pay off your existing mortgage. This means you’ll not only have to find the money to pay off the remainder of the mortgage, but you will also need to put down some money as a deposit on the next property you’re hoping to buy.
However, the good news is that it is often a temporary problem. In time, the equity in your home will increase as you carry on repaying your mortgage, while house prices should eventually recover too.
Will I lose my house if I am in negative equity?
It’s also important to know that while negative equity can be problematic, it doesn’t mean you will lose your home.
Properties are only repossessed if you do not pay off your mortgage. So long as you keep up with your monthly repayments, your property will not be repossessed.
However, being in negative equity can make it harder to keep up with those repayments as you won’t be able to remortgage to a cheaper deal when your initial fixed or variable rate comes to an end and you move onto the costlier SVR.
What can I do if I’m in negative equity?
Getting out of negative equity is a really good idea if you can afford to do so, and you have a couple of options when it comes to finding an exit route.
The first is to reduce the amount you owe on your mortgage. By making overpayments your equity will gradually increase.
If you have thousands of pounds at your disposal, then you might want to pay off a lump sum of your mortgage balance, but a more realistic option may be increasing the size of your monthly mortgage repayment. Most mortgages allow you to make overpayments of up to 10% of your outstanding mortgage without hitting you with early repayment charges.
Improve your home
Another option is to increase your property’s value so it is worth more than your mortgage once again. So, if you have money sitting in a savings account, you might want to invest it in some form of home renovations that will add value to your property, rather than using it to pay off some of your mortgage directly. However, this is not guaranteed to increase the value of your home so consider this option carefully.
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John Fitzsimons has been writing about finance since 2007. He is the former editor of Mortgage Solutions and loveMONEY and his work has appeared in The Sunday Times, The Mirror, The Sun and Forbes. Read more