Help with negative equity
Everything you need to know to understand, avoid, and escape the negative equity mortgage trap
Do you have a property in negative equity? Here's what it means, how to get out of it, and what to do if you need to move home don’t have enough equity to sell it.
What is equity in a home?
Equity is the difference between the value of your home on the open market, and the amount left to pay off your mortgage and any other loans that are secured against your home. For example, if your home is worth £150,000 and you have £100,000 left to pay, you have £50,000 of equity in your home. Equity is usually the sum of the deposit you put down when you bought the property, plus any payments made toward your mortgage and any increase in the value of your home.
What does it mean if you are in negative equity?
If the property value is lower than the amount you owe, you have negative equity. So, if your remaining mortgage is £150,000 and your home is valued at £140,000, you are £10,000 in negative equity.
How does negative equity happen?
A fall in house prices after buying a home with a high loan to value (LTV) mortgage is the most common reason why people get into negative equity.
High LTV mortgages increase the risk of negative equity because a smaller deposit means that house prices do not have as far to fall to wipe out all of your equity. For example, if you bought a house with only a 5% deposit and a 95% LTV mortgage, a fall in house prices of any more than 5% would put you in negative equity. Lenders offer better rates on lower LTV mortgages, so a higher deposit will not only protect you against falling house prices, the monthly payments will be cheaper too. This also applies if you take equity out of your home when you remortgage it.
If you have an interest only mortgage, where you are not making any capital repayments, the amount you owe will remain unchanged throughout the length of your mortgage so you are not building up any equity cushion to protect yourself against a fall in house prices.
Negative equity does not just apply to your mortgage – other loans secured against the property count towards it too. If you have a mortgage and you additionally take out a homeowner loan, you could easily find yourself owing more than your house is worth.
What happens if you are in negative equity?
Simply being in negative equity should not affect you as long as you continue to make your monthly mortgage payments and do not need to remortgage or sell your home.
When selling a property, the mortgage and secured loans are repaid from the sale price by your solicitor so if the sale price is less than your mortgage, you would still owe the bank money. If you are unable to demonstrate how you will pay this, they may prevent you from selling. We will tell you what you can do about this later on in this article.
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If you want to refinance your property after the initial promotional interest rate has expired, many lenders will only allow this if you have sufficient equity in your home, so you may find yourself trapped making higher mortgage payments.
How do I know if my property is in negative equity?
If you want to know the amount of equity in your home, or if you are in negative equity, you will need to find out the value of your property and how much you have left to pay on your mortgage and other secured debts.
If you know the redemption cost of your mortgage and put your home on the market to sell for an amount that would cover this but are not getting viewings or offers, this could be a sign that it is priced too high and you may be in negative equity.
How can I get out of negative equity?
There are three ways you can get out of negative equity:
Make overpayments on your mortgage
Refurbish or develop your home to increase its value
Wait it out
If you would like to be proactive about increasing the equity in your home, you could either reduce what you owe by making additional voluntary payments towards your mortgage, or increase the value of your home by renovating or developing it. The latter option is not without risk and will require you to invest money up front.
The third option is to sit tight and wait for your mortgage to reduce on its own through your regular capital repayments, or for house prices in your area to go up.
How can I move home if I am in negative equity?
If you are in negative equity and need to move home for any reason, it can be difficult to sell your property as lenders usually require you to repay what you owe them out of the money you sell it for. If the sale price is less than the mortgage this is known as a shortfall, and the lender will require you to pay the difference from your savings or else prevent you from selling.
A negative equity mortgage can enable you to transfer negative equity to a new property so you can move home without having to pay it off. However, very few lenders offer this type of mortgage and you would still need to find the money to pay a deposit for your new home.
If you are unable to afford to pay the difference or transfer debt to a new property, discuss your options with your lender as it may be possible to put a repayment plan in place where your debt can be repaid over time, although you should consider how this will increase your expenses for a long time to come. In some situations it may be also possible to write off some or all of the debt, however this can have serious consequences for your credit score and prevent you from getting a mortgage or other credit in the future.
If your lender is stopping you from selling your home and you are no longer living there, renting it out may cover the cost of owning it until you have enough equity to sell. However, if you are considering renting out your property, there are many things to consider, including getting permission from your mortgage provider, legislation and tax implications, and whether you can commit to the time and responsibility of managing tenants.
How Betterplace can help you
Betterplace’s flexible approach to home buying enables people with property in negative equity the freedom to move home now and sell later to avoid being stuck with an expensive property or having to find the money to pay off the lender.
We can put an agreement in place to buy your property from you at a future date when it has returned into equity, while allowing you to move home now. In the meantime, we look after your mortgage payments and all ownership and landlord responsibilities while renting the property out. Because everything is taken care of up front, you can leave your worries behind while we do the rest.
If you would like to know more, please call us on 024 7736 0020
or fill out our quick contact form.