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.
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.
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.
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).
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.
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.
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;
Take a look at our Guide to Remortgaging for more on this process
Take a look at our guide to Buy to Let for more information on how these mortgages work.
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.
My biggest concern was finding a mortgage with no strings attached. My options were clearly explained to me and I felt confident about the decision. Alice Silverman, Stoke-on-Trent
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THINK CAREFULLY BEFORE SECURING OTHER DEBTS AGAINST YOUR HOME. YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON A MORTGAGE OR ANY OTHER DEBT SECURED ON IT.
IF YOU ARE THINKING OF CONSOLIDATION EXISTING BORROWING YOU SHOULD BE AWARE THAT YOU MAY BE EXTENDING THE TERMS OF THE DEBT AND INCREASING THE TOTAL AMOUNT YOU REPAY.
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