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Negative Equity Guide

Homeowners hope that the properties they purchase will increase in value over time. However, this doesn’t always happen, causing problems for those looking to sell and move on, or even keep up with their mortgage payments.

This guide will explain what negative equity is, and the possible solutions you can try, to rectify the situation.

What is  Negative Equity?

Negative Equity is when the mortgage secured on a property is higher than the property’s value at resale.

Those who take out an interest only mortgage are more likely to find themselves in this situation, compared with those who have taken out a repayment mortgage. This is because, with a repayment mortgage, you are building up equity in your home, by slowly reducing the mortgage capital debt. With an interest-only mortgage on the other hand, you will not repay the capital until the mortgage term is complete. If you cannot, for whatever reason, cover the cost of the mortgage capital, a sale at a lower value will result in the borrower falling into negative equity. Lenders will then require these customers to make up the difference, regardless of the home’s resale value.   

Negative Equity mortgages become a major issue when the mortgage holder is struggling to keep up with monthly repayments. If this is the case, your home may be repossessed.

Read more in our Guide to Mortgage Arrears, for tips on how you can get back on track with your mortgage repayments.

Please note: being in negative equity does not automatically mean that your home will be repossessed. If you are keeping up with the payments, your lender has no grounds to evict you.

What causes fluctuations in the Property Market?

There are many different causes for fluctuations in the housing market. When house prices rise, this is due to demand for housing outstripping supply, in any given area. Prices can rise if a town sees many new facilities (like shopping centres and new schools) popping up over time. Prices in property can also rise if other investment opportunities decline (such as low returns in interest savings accounts). In this case, property is seen as the more attractive prospect to many speculators hoping to make a quick return on their investments.

In contrast, house prices can fall if interest rates rise along with unemployment. This is due to the economic climate making it more difficult for borrowers to find an affordable mortgage, as well as save for a large enough deposit.  

What Causes Price Rises and Falls in Individual Properties?

The value of one property over another is determined by many factors, such as the condition of the building and the extent to which a buyer would need to invest to get the house up to a desired standard. Similarly, adding extensions or putting an extra bedroom in the attic, for example, can greatly increase a home’s value.

Location is also very much a value-determining factor, in relation to the property’s proximity to local amenities as well as its geographical location, (houses closer to London have higher asking prices than houses situated in the north of England, for instance).

What other factors Increase the risk of negative equity?

Taking out a mortgage with a high Loan to Value ratio will mean that you are more at risk of going into negative equity. For example, those on 90% LTV mortgages are more at risk of owing more than 100% of the property’s value, if their house price falls, in comparison to someone who has a 60% LTV mortgage on their home.

Second Mortgages (i.e. securing more money against your home) will also move the ratio of loan to value, closer to the 100% mark.

Let’s Look at an example:

Ben and Alice bought a house five years ago worth £110,000. They put £10,000 down as a deposit and so a £100,000 mortgage was required. A few years later, Ben and Alice decided to sell up and move. However, a local estate agent valued their property at £100,000. This makes Ben and Alice £10,000 in negative equity.

Ben and Alice could try the other estate agents in their local area, to see if they would value their property at a higher price. Alternatively, as they have savings, they may look to add an en suite bathroom to their master bedroom, as a way of adding more value to the asking price.

How do I get out of Negative Equity?

If you are looking to sell your home and a valuator has told you that your home is now worth less than the price you bought it for, there are a number of things you can do to rectify the problem;

• Boost the Value of your Home – Carrying out renovation work on your property can be a solid way of adding to your home’s value. In an ideal world, you would want to add to an already up-and-together home, perhaps by adding a new bedroom or converting your front garden into a driveway to provide off-road parking. However, if your property needs a new roof, or is in need of ‘updates’ such as double-glazed windows, investing in these repairs before your sale can be costly, with little change seen in the home’s asking price, once the work is carried out.
• Stay Where you are – If you’re looking to move and your home is in negative equity, you can also choose to wait for a couple of years.  In doing this, you will be hoping that the housing market in your area will pick-up (in which case, you will be able to ask for more money from potential buyers).  
• Sell Anyway and Pay off The Mortgage Shortfall – If you absolutely need to sell now, knowing that your home is likely to go into negative equity, you can approach your lender and see if they will agree to let you pay off the difference over time. This is not an ideal situation, as you will need to arrange for somewhere else to live, which can be expensive, even if you choose to rent.
• Pay more Towards your Mortgage – You may have extra savings which you can put into repaying your mortgage debt, before your term ends. Lenders may impose an early repayment charge, however, in many cases, if the contributions are small and regular, you may be able to avoid the penalties.
• Remortgage your Home – If permitted by your lender, you may be able to alter your mortgage term, to pay it off over a few more years. Many lenders may prevent those approaching or in negative equity to switch to a new lender. Changing your mortgage may also incur extra charges.   

Take a look at our Guide to Remortgaging for more on this process

• Borrow the Difference – To cover a shortfall, you may be lucky enough to have family members or friends who can lend you money. Alternatively, you could try to get an unsecured loan to cover the difference and pay that off over a number of years. This however, should only be considered if you need a quick sale, as the interest on an unsecured loan will be higher than a typical mortgage.
• Rent a Room – If you find yourself in negative equity, you could try renting out a room and use the money to get yourself out of negative equity. Doing this will require the permission of your lender, this is called ‘consent-to-lease’. However, you may need to convert your mortgage to a buy-to-let mortgage, pay a charge and accept a raise in your mortgage interest rate. Your insurer will also need to be notified of your change in circumstances.

Take a look at our guide to Buy to Let for more information on how these mortgages work.

• Declare Bankruptcy or Voluntary Repossession – This should only be considered as a very last resort, if your mortgage shortfall is considerable.  The ramifications for your financial future will be severe.  You will be blacklisted for lending for at least six years and with cases of bankruptcy, you will not be able to act as director of a company, as well as facing other financial restrictions.
• Specialist Mortgage – Some mortgage brokers may be able to find you a specialist mortgage exclusively for customers in negative equity. These mortgages may have a higher interest rate and more restrictions placed upon them. If this is a route that appeals to you, it is best to seek advice on these products from an independent mortgage broker, who can help you track-down the best deal.  

In cases of negative equity, there are a range of options available to help.  But of course, speaking to an independent financial advisor is the best course of action for rectifying the situation. You can contact an independent mortgage broker here, free of charge. So, don’t delay, get help for your negative equity mortgage now.