Updated: Dec 6, 2020
Is your home in negative equity but you need to sell it? Here's what happens if your house is worth less than you owe, and what you can do about it...
It’s a familiar story. You have put your property on the market months ago and you are not receiving offers anywhere near your asking price. You thought you’d found a buyer but their lender’s survey gave a valuation less than the agreed price and their mortgage offer fell through. If this is the case, the market is telling you that the house is worth less than the asking price. But if you accept a lower offer, selling your home won’t cover your mortgage or other debts. What now?
Selling a house in negative equity
Most people expect property prices to go up in value over time, and to further increase the equity in their home by making payments towards their mortgage. However, if you are in an unfortunate situation where property prices are not doing so well and you need to sell, the amount you can get for your home may not be enough to pay back what you owe. If this happens to you, this means you have a property with negative equity, and you would still owe money, even if you sell it. If you can’t afford to pay it, this can mean you are stuck, unable to move home. But there is still hope.
Many people find themselves in the unfortunate situation of negative equity when the economy and housing market dips after they have bought a property. It can happen to anyone. You could be particularly vulnerable to this type of situation if you have purchased with only a small deposit, as the market does not need to move very much for the price to fall below the value of your mortgage. You could also be affected if you have taken out other finance agreements secured against your home, or taken equity out of the property through refinancing.
What happens if I sell my house for less than the mortgage?
If you bought your house with a mortgage, the lender will usually require you to pay back what you owe before you can sell your house. If you decide to sell your house for less than you owe on it, you will usually have to find other ways to pay the difference. If you can’t, your mortgage company may prevent you from selling it, leaving you in a sticky situation. Fortunately, there are still ways to overcome this challenge.
Can I sell my house with a secured loan on it?
Many people don’t realise the implications of secured borrowing if they need to move home. If you have taken out any other loans aside from your mortgage that are secured against your house, you will usually need permission from your lender to be able to sell. This will be written into the agreement you signed when you took out the loan. When a loan is 'secured', the lender will have what is called a ‘charge’ or ‘restriction’ on the property which prevents you from selling unless they allow it, which is usually only when the debt is settled.
If you need to move home, or sell your property for any reason, but are unable to pay the settlement on your mortgage or other secured debt, here are five things that you could do:
1. Wait it out
One option is to stay put and wait for the market to pick up, or until you have made enough loan repayments to remove or reduce the shortfall to an affordable level. Unfortunately no one has a crystal ball so you don’t know how long it will take. You could be stuck unable to move for months or even several years. Properties in some parts of the UK that went into negative equity after the 2008 financial crisis had still not returned to their peak price more than a decade later. If you need to move quickly, this might not be an option for you.
2. Make improvements to your home that add value
If the value of your home does not cover what you owe, you could make small improvements that increase what your home is worth. This could enable you to sell at a higher price to cover what you owe but it’s not without risk and may not be affordable, since you will need to invest even more money into it. Some home improvements such as redecorating, increasing energy efficiency or putting in a new bathroom or kitchen can be relatively inexpensive and increase the value beyond what you spend on making them.
3. Speak to your lender to find out what they can do for you
Some mortgage lenders may allow you to transfer negative equity to your new home. This may incur a fee and often means remaining with the same lender, so you may end up paying high interest rates. However, only very few lenders offer negative equity mortgages so this depends on who your loan is with. If you have no way of paying off the loan by selling the property, some lenders may allow you to ‘short-sale’ your home. This means that they accept a shortfall (or deficit) in the amount of the loan that is paid back when you sell the property. You should be aware that writing off debt in this way can negatively affect your credit score and your ability to get a mortgage or other credit in the future. You may wish to speak to a debt advice specialist for financial advice.
4. Use an unsecured loan to pay off your secured loan
If you need to pay off a secured loan or mortgage on your home before you can move, you may be able to take out an unsecured loan to cover it. When taking out an unsecured loan to pay off negative equity, you should also factor in any repayment fees into the amount you borrow. This option requires you to have good enough credit to be able to take out another loan, and you will need to bear in mind that making a loan application at a time you are trying to secure a mortgage for your next home may count against you.
5. Sell your home to Betterplace
If you find yourself trapped and unable to move because you can’t sell your home for a price that enables you to settle your mortgage or secured debt, we may be able to help. We offer a flexible house buying service, and unlike other house buying companies who only focus on buying in cash – regardless of whether you can afford it – we focus on getting to the root of the problem and helping you solve it. We’ll look at your individual circumstances and seek creative ways that we can help you pay off debts and meet your mortgage obligations as part of the sale, so you are free to move home.
We understand that needing to sell your home and deal with debt is stressful. If you are in a situation where you need to sell your home but can’t, we encourage you to look into each of the options available to you. If you would like to know more about how we could help, get in touch for a chat with no obligation.