What Is Negative Equity And Why It Can Be A Problem

What is negative equity?

Negative equity is a nightmare situation to be in. With the possibility of a recession on the cards after everything’s that happened in the past year, it’s likely that more homeowners will find themselves in this position.

Negative equity is when a property is worth less than the mortgage you took out on it. Being in this situation means it could be really hard to sell, move or remortgage. A house gets into negative equity when house prices fall.

For example if you bought a property for £200,000, with a mortgage for £180,000 and the property is now worth £160,000, you would be in negative equity. However if you bought a property for £200,000, with a mortgage for £180,000 and the property is now worth £180,000, you wouldn’t be in negative equity.

It’s estimated that there are half a million properties in the UK in negative equity. But if we see a housing crash or a recession this number is likely to jump up pretty quickly.

Why is negative equity a problem?

You may not actually know if you’re in negative equity or not. And if you’re not planning to sell your home anytime soon it’s not a massive problem. But if you want to know you’d need an estate agent or surveyor to value your home and then compare it vs your latest mortgage statement and how much you owe. If how much you owe is more than the valuation of the house then you’re in negative equity.

As I mentioned above this is only an immediate issue if you want to sell your home. This is because you’ll owe your mortgage lender more money than you’ll get from the sale of your property. So if you sell you’ll have to repay the difference between the value of your home and the mortgage from your own money. This may mean you can’t afford to move.

It will also be difficult to remortgage as most lenders won’t let people in this position switch to a new mortgage deal when their existing one ends. If you do want to move and you’re in negative equity speak to your lender and see what your options are. And speak to an independent mortgage broker for more advice.

What to do when your home is in negative equity

To avoid getting into negative equity in the first place put as large a deposit down as possible. The larger the deposit the less chance you’ll have of getting into problems. If your home is in negative equity here are a few things you can do.

Make mortgage overpayments

Start making overpayments on your mortgage to reduce how much you owe. This is a great option to do even if your home isn’t in negative equity as you’ll save money on interest, paying less for your home overall. And it could mean you’re mortgage free quicker.

Check with your lender how much you can overpay before early repayment charges are added. For a lot of lenders this is up to 10% of the value per year. So if your mortgage was £180,000 you could overpay by £18,000 a year without being charged. But unless you come into some money it’s unlikely you’ll hit these maxes anyway.

I’ve done a whole post on mortgage overpayments that you can read here.

Rent out your home or get a lodger

To make some extra money and allow you to make overpayments you could look at taking on a lodger if you have the space. Rent out a spare bedroom or attic room etc and then any income you make from that can go into your mortgage and help get you out of negative equity sooner.

If you need/ want to move anyway and can secure the funds for your new property you could rent out your home. Then once the property price increases again sell it so you won’t have to pay the difference. Maybe you can move in with family until the property price increases or you’ve made enough from rental income to pay the difference.

Getting a second mortgage may be tricky though as you’d need to convince a lender that you can afford two mortgages. Although some lenders may accept the rental income you’ll earn from future (or current) tenants. Although this isn’t always the best option as you need to know you can afford both even if you had no tenants.

Speak to a mortgage broker

If your home is in negative equity speak to a mortgage broker straight away to see what your options are. They may be able to suggest options for getting out of negative equity. Or lenders who may offer you a mortgage still if you’re moving.

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