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Negative equity - How to get out of it

May 25, 2018
Negative Equity

Negative equity - How to get out of it

If you’re a homeowner, negative equity is a term that inevitably triggers alarm bells. But what is negative equity, how could it affect you, and can it really be avoided? We explore further.

 

Negative equity - what it all means

When homes lose their value, their current market valuation could drop below the amount outstanding on the mortgage.If that happens, you’ll be in negative equity, which can be a big stumbling block if you wish to move. Why? Because even when your home is sold, you will need to repay the mortgage and will have a shortfall.
 

Who is at risk of falling into negative equity?

 
Generally speaking, the higher your original loan to value (LTV) when you buy, the more at risk you will be of falling into negative equity if house prices fall. If you’re on an interest-only mortgage, you’re also more likely to fall into negative equity because you’re not actively repaying the capital element of your mortgage. Additional borrowing and missed mortgage payments could place you at risk too.

 

How to find out if you are in negative equity

There’s no denying that moving house while in negative equity can be very complex, and if you find yourself in this situation it’s understandable that you’ll feel worried. To understand whether you’re in negative equity, you need to know the current value of your property, and the balance outstanding on your mortgage. Your lender will be able to provide you with your outstanding mortgage balance and what it would cost to redeem it. You can get a good idea of what your property is worth by looking to see what similar properties in your area have sold for.
 

What can you do about it?

Online sites such as nethouseprices and Zoopla can help with this, and also have calculators which give an indication of what your property is worth.The difference between these 2 figures is your negative equity sum. Once you know the size of your negative equity, you’re in a better position to decide how to deal with the situation.
 
Here are our top tips:
 
1.Stick it out. If house prices are fluctuating, it may be worth waiting to see if they rise again. As time goes on, your negative equity may lessen or even disappear, although this depends on the market and is out of your control.
 
2. Make home improvements that add real value. Do your research, speak with local estate agents and find out what changes you can make to up the value of your home on the current market - whether that’s a new kitchen, en suite or a small extension.
 
3. Pay off your mortgage in chunks or make regular overpayments. Although some lenders charge for early repayment, this is one way to dig yourself of negative equity relatively quickly - providing you have the cash to spare. Your lender may allow for some overpayment without incurring charges, so it’s sensible to check with them to see if that is possible.
 
4. Rent your home instead. You’ll need to contact your lender to get their agreement to ‘consent to let’ and they may charge you additional interest. Do your sums to make sure the rent you will receive will cover your mortgage repayments or you can afford the shortfall if there is one. Remember you’ll pay an additional 3% additional stamp duty on any subsequent property purchase, although if you sell the initial property within 3 years you can claim a refund.
 
5. Speak to your existing lender to see if they are happy to port your existing mortgage to a new property.  As long as you’re not making your situation any worse, they may agree to this.  

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