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Negative Equity

 

Falling property prices

Negative equity is when the value of your home, which is used as security against a mortgage, falls below the amount you still owe on your mortgage.

When house prices are rising, negative equity becomes less commonplace because the value of the property outstrips the value of the loan you would have used to buy it. So if you've taken out a mortgage of £180,000 for a property worth £200,000 and the value rises to £230,000, you're quids in.

If house prices drop, however, people with high loan-to-value mortgages and with little equity in their homes become at risk of falling into negative equity.

EXAMPLE – NEGATIVE EQUITY

You take out a mortgage of £180,000 to buy a property worth £200,000. You have provided a 10% deposit of £20,000 – this is the equity in the property.

However, property prices then fall, and your home's value slumps to £150,000. The amount left on your mortgage is now greater than the value of your home, pushing you into negative equity. The amount of equity in your home is now -£30,000.

Before the recession hit, a number of people took out 90% mortgages, 100% mortgages or, in some cases, more than 100% of the purchase price. Now that house prices have tumbled, negative equity is an increasing concern for many homeowners who are becoming trapped in their own homes, unable to remortgage or move.

Is negative equity a problem?

While no one wants to end up in negative equity, it does only become a problem if you are looking to move home or if you need to remortgage. If you're comfortably meeting your mortgage repayments and are happy to stay put, it shouldn't affect you. In this case, the best thing is to sit tight and ride out the storm until the housing market picks up.

However, for anyone needing to move house in the near future, negative equity is a major problem as you will be forced to make a loss on your home when you sell it and may not be able to repay the outstanding debt of you mortgage.

You're also likely to face difficulties if your current mortgage deal is coming to an end and you want to remortgage because few lenders will offer you another mortgage if you are in negative equity as you won't have any equity to use as a deposit. You will probably have to stay with your current lender and can't switch to a better deal.

Some lenders do offer mortgage deals for customers in negative equity, such as Lloyds and Halifax (part of the same banking group). These deals may not be as competitive as other deals on the market, but they are worth investigating.

Many of the mortgage deals which previously allowed you to borrow more than 90% of the property's value are no longer available. In this case, you're likely to have to stay on your lender's standard variable rate (SVR).

This isn't necessarily a bad thing as the low base rate means most SVRs are pretty competitive at the moment. But although SVRs tend to move in line with base rate, this is not guaranteed, and some lenders have recently been increasing their SVRs despite a stationary base rate. Rising SVRs mean higher mortgage repayments and in some cases, this could cause further debt problems. It's therefore a good idea to put some spare cash into a savings account if you can afford to so that you'll have this to fall back on if you need it.

How to deal with negative equity

If you are in negative equity, one of the best ways to get yourself out of it is to build up the equity in your home by overpaying your mortgage if you can afford it. Some lenders will allow you to overpay your mortgage by up to 10% a year (£500 a month in the case of Nationwide), penalty-free. A few have no restrictions on overpaying.

You could also look to make improvements to your home that would add value. This could be anything from getting new floors or carpets laid, redecorating, getting a new bathroom or kitchen or even a loft conversion. Again, however, only do this if you can afford to.

What to do if you're struggling

Talk to your lender if you're struggling to meet your mortgage repayments. There's nothing worse than leaving your lender in the dark. It may be willing to offer you a temporary lifeline such as extending the term of your mortgage or taking a payment holiday. Just be warned that this will mean you'll end up paying more interest overall, but it may help you in the short-term.

If you're in serious financial difficulties, you could also consider selling your property. But remember that if your home sells for less than the outstanding mortgage, you will still need to make up the difference to pay back your lender.

Of course, this is really a last resort and will only be necessary if you're falling significantly behind on your mortgage repayments. Being in negative equity doesn't go hand in hand with failing to keep up with your monthly repayments. The main thing is to always keep your lender in the loop about your situation and if you are in negative equity, don't panic before considering your options carefully.

What to do if you're in negative equity

1. Build up the equity in your home by overpaying on your mortgage if you can

2. Consider home improvements that would add value to your property

3. Talk to your lender if you're struggling with your repayments

4. As a last resort, consider selling your property

  1. Negative equity is only a problem if you need to move or remortgage
  2. Talk to your lender if you're struggling financially
  3. If you can afford to, think about home improvements to add value

Some lenders offer mortgage deals for those in negative equity so take a look at what these might be able to offer you

 

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