Negative equity is every homeowner’s worst nightmare. And when you team low deposits with a struggling housing market and a potential recession on the cards, it’s likely that more homeowners will find themselves in negative equity. Here are the key things you need to know.
What is negative equity? How does negative equity work?
A property is in negative equity if it’s worth less than the mortgage secured on it. It’s usually caused by falling property prices.
For example, if you bought a house for £200,000 with a 10% deposit of £20,000 and the property’s value dropped to £150,000, you would be in negative equity because you owe more money to your lender than your house is worth.
However, if you had bought a house for £200,000 with a 10% deposit of £20,000 and the property’s value dropped to £190,000, you wouldn’t be in negative equity because your house is still worth more than the amount you borrowed.
How common is negative equity?
Research suggests there are around half a million properties in negative equity in the UK. Some areas are more badly affected than others. In Northern Ireland, for example, as many as two in every five properties bought after 2005 are in negative equity.
Why is negative equity a problem?
One of the biggest problems comes when you want to sell your home.
This is because you owe your lender more money than you can get through the sale of your property.
If you have savings to make up the difference between the sold price and the amount you owe, you can repay the difference to your lender. If you can’t make up this difference, you may have to stay where you are in the hope that house prices recover.
It can also cause problems for those who want to remortgage their home, whether they’re looking to free up equity from within their property to spend on other things or they’re looking to lower their repayments and get a better interest rate.
Can I move house if I’m in negative equity?
Most lenders will refuse to offer new mortgage deals to those in negative equity, but it’s not always out of the question completely.
Talk to your lender to find out what options are available to you. I’d also recommend speaking to an independent mortgage broker to discuss your finances and see if they can offer any advice.
Some lenders offer what’s called a ‘negative equity mortgage’. This will let you transfer your negative equity to the house you’re moving to. Unfortunately, this type of mortgage is difficult to come by and, thanks to the pandemic, mortgage lenders are less likely than ever before to offer this kind of flexibility.
How to reduce your chances of negative equity when buying a home
If you’re not already in negative equity but you’re looking at buying a property, it’s wise to put down as large a deposit as you can afford. The larger your deposit, the smaller your chance of problems.
What can I do if my home’s already in negative equity?
Overpaying your mortgage
It might be a good idea to overpay your mortgage if you can afford to.
Get in touch with your lender to find out whether you can make overpayments and, if so, how much you can overpay before early repayment charges are added.
Most lenders allow repayments of up to 10% of your mortgage value each year. This may mean that if you have a £150,000 mortgage, you’ll be allowed to overpay by £15,000 a year. Of course, this is more than most people can afford to overpay anyway.
It’s worth typing your details into a mortgage overpayment calculator such as the one provided by Money Saving Expert. This can be really encouraging because it’ll show what a difference your overpayments will make to the length of your mortgage and amount of interest you owe.
Renting out your home
Some people choose to rent out their home if it’s in negative equity. They’ll move into the new property and keep the old one in the hope that eventually, the property price will increase and they’ll be able to sell it or they’ll have enough money to pay the difference to their lender.
However, this won’t be an option for everyone. For example, you’ll need to pay a deposit on the property you move into and, if you can’t afford to ‘buy your way out of’ negative equity, this is unlikely to be an option either.
Assuming you’ll need to get a mortgage for your new property, you’ll need to convince lenders that you can afford the mortgage on your new home and the mortgage on the property in negative equity. Some lenders might accept the rental income you’ll earn from future tenants, but many will want to see that you can afford to pay both mortgages during periods when there are no tenants in the property.
Speak to a mortgage broker
If your home’s in negative equity and you’re looking to move, speak to a mortgage broker to assess your options.
When buying my apartment back in 2017, I used Habito as my mortgage broker and I wouldn’t hesitate to recommend them to you. They’re a fee-free broker and they operate entirely online. This is particularly ideal in the middle of a pandemic because you’ll want to be spending as much time as possible at home anyway! Instead of meeting in an office like you would ordinarily with a broker who works face-to-face, you’ll use Habito’s online chat service, email and phone calls, if you wish.
I’m a Habito affiliate which means if you create an account with this link, you and I will each earn a £50 John Lewis voucher on successful completion of your mortgage.
