In today’s property market, many homebuyers need a substantial deposit. However, approximately 500,000 homeowners in the UK find themselves in a predicament known as negative equity. But what exactly does negative equity mean? This guide aims to clarify its definition and offer strategies for addressing it.
What is Negative Equity?
Negative equity occurs when the value of your property is lower than the outstanding mortgage amount. Essentially, it means that the portion of your property’s value that you actually own (known as equity) is negative. Equity represents the difference between the property’s market value and the amount owed on the mortgage, including the initial deposit and any mortgage repayments made over time.
For instance, suppose you purchased a house for £200,000, putting down a 5% deposit of £10,000 and securing a £190,000 mortgage, opting for an ‘interest-only’ repayment plan. In this scenario, your equity would be limited to the £10,000 deposit, and it would not increase until you begin paying off the principal sum of the mortgage. Consequently, if the property’s value declines, you could find yourself in negative equity.
What Causes Negative Equity
Negative equity typically arises when property values decrease, leading to a situation where the property’s market value is insufficient to cover the outstanding mortgage balance. For example, if the property you purchased for £200,000 experiences a 10% decrease in value, dropping to £180,000, it would be worth less than the £190,000 owed on the mortgage. This shortfall creates negative equity.
Another common cause of negative equity is substantial damage to the property, such as from a severe fire or flood.
How to know if you are in negative equity
Determining whether you’re in negative equity involves comparing your property’s value to the outstanding mortgage amount. To ascertain your property’s value, you can seek a valuation from an estate agent. Additionally, accessing information about your mortgage balance is typically straightforward, as many mortgage providers offer online account management services or provide assistance over the phone.
Is Negative Equity a Problem
Negative equity can pose challenges if you intend to sell your property or refinance your mortgage. Lenders typically do not allow individuals in negative equity to refinance their mortgage, which means you may be unable to switch to a more favourable deal or secure a better interest rate.
Selling a House in Negative Equity
Selling a house with negative equity requires addressing the outstanding amount of negative equity, which means covering this deficit from your own funds. Using the scenario mentioned earlier, you’d need to settle the remaining £10,000 from your savings or through a personal loan before finalising the property sale.
Alternatively, you might consider a negative equity loan, a solution where the bank allows you to transfer your existing mortgage to the new property you intend to purchase. However, this option is not widely available, and to qualify, you must demonstrate your ability to manage the repayments effectively.
Does Negative Equity affect my Credit Rating
While owning a property with negative equity doesn’t directly impact your credit rating, it may lead to financial challenges that could result in missed mortgage payments, adversely affecting your credit score. For further guidance on navigating financial difficulties associated with negative equity, Negative Equity UK can provide assistance.
How to eliminate negative equity
There are several methods to eliminate negative equity:
- Increase your monthly mortgage payments until the outstanding amount owed to the provider is less than the property’s current value.
- Make a lump sum repayment on your mortgage to immediately reduce the overall amount you owe.
- Consider renting out your property, or a portion of it, and utilise the rental income to make additional payments toward your mortgage.
- Enhance the value of the property by investing in improvements or renovations.
- Explore specialized mortgage products offered by your lender that may assist in addressing negative equity.
Tips for avoiding negative equity
You can prevent negative equity by:
- Purchase a property in a consistently desirable area with stable house prices.
- Avoid properties located in high-crime areas or areas prone to natural disasters such as flooding or fire.
- Opt for a repayment plan that gradually reduces the initial mortgage balance.
- Increase the value of your property through strategic improvements and upgrades.
What occurs when your property falls into negative equity?
If your property enters negative equity, there are no immediate consequences. Typically, the only way to realise you’re in negative equity is by getting a valuation of your home. While there’s no urgency to address it immediately, it’s crucial to recognise the long-term financial implications. It’s advisable to create a plan to increase your equity in the property, ideally well in advance of any plans to sell.
To what extent does negative equity pose a problem?
While negative equity may not pose an immediate threat, it can significantly restrict your financial choices. If selling isn’t important, you can opt to wait and gradually pay off your mortgage. However, if you’re unable to refinance and lack the means to cover the shortfall in a potential sale, negotiating with your lender becomes necessary.
In such cases, lenders might agree to a sale at a price lower than the outstanding mortgage balance, forgiving the remaining debt. They typically agree to this if it’s more profitable than repossessing the property outright.
Negative equity isn’t necessarily a dire issue, but it warrants attention. Having a plan to manage your mortgage repayment strategy can help mitigate the negative consequences often associated with it.
Does negative equity resolve itself?
Negative equity might naturally resolve over time. It often correlates with market fluctuations. For instance, a downturn in the property market could diminish your property’s value, leading to negative equity. Yet, if you’re not in a hurry to sell, waiting for market conditions to improve might lift your property’s value, pulling you out of negative equity as values increase.
Do I need to be concerned about negative equity?
Negative equity might only become a pressing issue if you attempt to sell your property during a downturn in the market. Additionally, it could pose challenges if you encounter difficulties with mortgage payments or if you aim to refinance your home. However, in various situations, individuals may not even recognise they’re in negative equity, and it may have no impact on their daily lives.
Is negative equity on the rise in 2022?
In 2022, the UK’s property market has experienced its first sustained downturn in several years. Average house prices throughout the UK decreased by 1.8% in 2021, leading to a growing number of individuals facing negative equity.
UK banks have cautioned homeowners about the potential dangers, especially for first-time buyers who often have mortgages with high loan-to-value ratios and minimal equity in their properties. Nonetheless, UK banks have suggested that this phase of heightened negative equity among UK homeowners is expected to be temporary.
Selling your Home due to financial difficulties?
Selling your property to pay off debt is a time sensitive process. As such, the traditional house selling route is probably not the best option. An alternative is to look for a local house buying company such Olivia Rose Estates, who can typically purchase properties for cash and in much quicker timescales. We are here to help you sell your house fast. We can offer a guaranteed cash purchase for your property in a timescale that suits you. It could be a couple of weeks, or even just a few days. You no longer have to pay estate agents fees and deal with the potential long delays of a traditional sale process.
We will help guide you through the process of selling your home. From the initial valuation to the final completion date, rest assured you are being guided by trusted property professionals who are here to help you get the most out of your house sale and ensure you have a hassle-free experience.
