Having negative equity in their property is a disaster for homeowners. With the housing market struggling, a recession on the horizon, and high loan-to-value mortgages needing to be serviced, many homeowners are in danger of venturing into negative equity territory.
But, what is negative equity, and what can you do to minimise the effects of it? This article aims to give you all the information you need about negative equity and a few ideas on dealing with it.
What Is Negative Equity?
The term negative equity is used to describe the value of your home compared to the outstanding loan. If the property value is less than the outstanding loan, it is deemed to have negative equity.
The leading cause of negative equity is when the property market is in recession and prices fall. Take the example of a property purchased for £220,000 with a 10% deposit of £22,000. If the market value dropped to £190,000, the property would have negative equity of £8,000 because the sum borrowed was £198,000. However, if the value only dropped to £200,000, it would not be classed as having negative equity, because it would still have £2,000 of equity above the amount borrowed.
Is Negative Equity Common?
Around 500,000 properties around the United Kingdom are in negative equity. The problem is not spread equally in terms of geography. For instance, in Northern Ireland, around 40% of homes purchased after 2005 have negative equity.
What Is The Problem With Negative Equity?
Negative equity becomes a problem when it comes to selling your property. As your home is worth less than the outstanding borrowing, you might struggle to repay the lender.
There are two options in this situation. You can find the money from another source, such as savings, to make up the difference and repay your lender. You can remain in your property until house prices rise, or you’ve made enough repayments to get out of negative equity.
When it comes to remortgaging your property, your lender might be reluctant to let you borrow additional funds when your house value does not cover the existing debt. So, plans for renovations or another large capital spending might have to be delayed. Negative equity can also exclude you from the best interest rates when it comes to remortgaging.
Does Negative Equity Prevent You From Moving Home?
It is unlikely that a lender will allow you to borrow additional funds if your home is valued at less than your outstanding loan. However, remortgaging is not totally out of the question.
If you need to remortgage, your first step should be to speak with your mortgage provider and determine your options. You may also want to consult an independent mortgage advisor to find out if they can offer any help.
There is a product available known as a ‘negative equity mortgage.’ These mortgages allow you to transfer your negative equity into your new home. However, even before the pandemic, these mortgages were rare. Now, they are even more challenging to come by.
How Can You Reduce The Risk Of Negative Equity?
Putting down as large a deposit as possible will help avoid the risk of negative equity. A considerable deposit will give you a buffer between a potential fall in house prices and the outstanding loan on your property.
Is There Anything You Can Do If Your Home Already Has Negative Equity?
There are a couple of things you can do if your home is already in negative equity.
Making overpayments on your mortgage is one way to reduce the amount of negative equity in your home. You should get in touch with your mortgage provider to find out how much you can overpay each month, as some mortgages come with penalties for the overpayment.
Most mortgage providers allow you to make an overpayment of 10% each year. So, on a £200,000 mortgage, you can make overpayments of up to £20,000. Of course, you can only make overpayments on your mortgage if you can afford it.
There are mortgage overpayment calculators available online, and these are worthwhile putting your details into. These calculators will show you the difference you will make in terms of interest payments and your mortgage’s length, should you make overpayments.
Rent Your Property Out
Renting out their property is something that many people choose to do if their properties fall into negative equity, and they want to move. Doing this will allow them to keep hold of the property with negative equity until the market improves, and the negative equity is removed. The rent they receive will enable them to move into their new home.
This renting option is not for everyone. For instance, you will need to put down a deposit on your new home, so you’ll need funds for this. There is also the risk that you will not be able to rent out your old home or have periods of non-occupancy.
Even if you have guaranteed and reliable tenants, convincing your mortgage lender may be challenging. They might want to have proof that you can pay both mortgages simultaneously, should there be an issue with the rental property.
Negative equity can be a nightmare for some people planning to move home. However, buying your home is a long-term investment, and the period you experience negative equity should only be temporary. If your home is already in negative equity or it might be soon, you should discuss your options with an independent mortgage advisor.