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What is Negative Equity & What Does it Mean for your Mortgage?

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15th May 2020 (Last updated on 15th May 2020) 7 minute read

Negative equity means that your outstanding mortgage is higher than the value of your property. According to Property Reporter, negative equity affects nearly half a million UK properties and many people will be in negative equity without realising, but there are options to help you reduce your negative equity.

Compare My Move work with property industry experts to bring you insightful advice and guidance throughout the buying and selling a house process. This guide will cover everything you need to know about negative equity and how it will affect your mortgage.

This article will cover the following:
  1. What Is Negative Equity?
  2. How To Know If You're In Negative Equity?
  3. How To Calculate The Equity In Your Home?
  4. Who Is At Risk Of Negative Equity?
  5. How Does Negative Equity Affect Your Mortgage?
  6. What Is A Negative Equity Mortgage?
  7. Selling A House With Negative Equity
  8. Reducing Your Negative Equity
  9. Save On Your Move With Compare My Move

What Is Negative Equity?

The equity that you own in your house will be the difference between the current value of the property and the amount of outstanding mortgage. For example, if you bought a house worth £250,000 and put down a deposit of £25,000, then you will have 10% equity in your house. 

Many people hope that over time their house will increase in value as you continue to pay off your mortgage, this means your equity value will also grow. However, if house prices were to fall, you will find yourself in negative equity. 

Negative equity is when your property is now worth less than the mortgage loan you secured against your house. Usually caused by a fall in house prices, negative equity affects over half a million properties in the UK. 

How To Know If You're In Negative Equity?

Many people are unaware that they’re in negative equity, but it is worth finding out for peace of mind. To check if you’re in negative equity, you will need to get a valuation of your property and compare that with how much mortgage you have outstanding. 

If your outstanding mortgage is higher than the property’s value, that means you are in negative equity. The difference between the two values will be how much you are in negative equity by. If you’re thinking of selling your house, talk to a licensed conveyancer for their expert opinion.

You can use a free online valuation or get help from your local estate agent to value your property. Then you’ll need to check your latest mortgage statement to determine how much mortgage you have outstanding, alternatively, you can contact your mortgage lender to find out.

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How To Calculate The Equity In Your Home?

To calculate the equity in your home, you will need to know the current value of your property and the remainder on your mortgage loan. The difference between the two will be how much you are in negative equity.

If you bought a house worth £150,000 with a mortgage of £120,000, and your property is currently valued below the original price, you will be in negative equity. If you own your house outright without a mortgage, you cannot be in negative equity.

Who Is At Risk Of Negative Equity?

If you live in an area that’s been hit drastically with a fall in house prices and you have a 95% or 100% mortgage, then you are most at risk of going into negative equity. You’ll be at risk of negative equity if:

  • You live in an area with a fall in house prices
  • You have a 95% or 100% mortgage
  • You have an interest-only mortgage
  • You overpaid for your house at the time

How Does Negative Equity Affect Your Mortgage?

If you wanted to remortgage and you’re in negative equity, it’s likely that your lender will approve. Your property wouldn’t give the lender enough financial security against their lending, and you will likely be put onto their standard variable rate.

The type of mortgage that you have will determine how negative equity will affect it. Below we look at how negative equity will affect your mortgage and what is the best option.

Negative Equity And Interest-only Mortgages

If you have negative equity on an interest-only mortgage, unfortunately, it’s not as straightforward. Other than overpaying on your mortgage if your lender will let you, you will have to wait it out for the housing market to improve. 

Negative Equity And Fixed-rate Mortgages

If you’re meeting your monthly mortgage payments on a fixed-rate mortgage, it’s advised to continue doing this until you reach the end of your term. If you’re still in negative equity nearing the end of your mortgage, you should consider overpaying or sorting out your negative equity before you get a new deal, 

Negative Equity And Tracker Mortgages

Every monthly mortgage payment with a tracker mortgage will help to reduce your negative equity, as long as your mortgage isn’t interested only. If you stick to paying your monthly payments, you are always working towards getting out of negative equity. 

What Is A Negative Equity Mortgage?

If you don’t have the option to pay off some of your negative equity, a negative equity mortgage may be an option for you. Nationwide offer a negative equity mortgage to existing borrowers and apply a strict criteria. Below we list the pros and cons of negative equity mortgage.

Advantages of negative equity mortgages:

  • You get the freedom of moving house without having to pay off your negative equity right away.
  • You can apply for a negative equity mortgage even if your current mortgage is with a different lender.

Disadvantages of negative equity mortgages:

  • Negative equity mortgages are often subject to early repayment fees as you are ending your current mortgage early. 
  • You can expect other additional fees from your new mortgage if the interest rates are higher.
  • A negative equity mortgage is rare and only offered by a select few specialist lenders.

Selling A House With Negative Equity

You should avoid selling your house if it has negative equity, as you will be responsible for paying the difference. If you sell a house with negative equity, that means you will be selling it for less than the amount the lender borrowed you. Many mortgage lenders will allow you to re-pay the shortfall over time using a repayment plan, but it’s advised to talk to them first.

Selling a house with negative equity will also mean you will lose your initial house deposit and won’t be making a profit from the sale as it is now worth less than your mortgage loan. It will also affect how much you can sell your house for. This will make it significantly more difficult to buy a new house and continue with the moving house process. 

If you do need to sell your house with negative equity, there are options:

Wait Until The Market Improves

The safest option is to hold on until the market improves. In the meantime, you could make small improvements to your property to try to help increase its value. Research other properties that have recently sold in your area and look for inspiration on DIY websites. 

Negative Equity Mortgages 

A select few specialist mortgage lenders can offer you a negative equity mortgage. This means you’ll be able to transfer your negative equity over to a new property so you don’t have to repay the difference. Be aware that you may have to pay mortgage fees to cover the early repayment. 

Look at Remortgaging 

If your mortgage deal is coming to an end, you should talk to your provider to see if you can remortgage. It may be difficult if you’re in negative equity and they could move you on to their standard variable rate mortgage (SVR). If their rate is lower than your current mortgage rate, you will pay less in repayments. This can help you save money to pay off your outstanding mortgage in order to sell your negative equity house. 

Let Out Your Property

You could consider renting out your property whilst you rent in a cheaper location. This will allow you to save some money to pay towards the outstanding debt. If you’re serious about letting out your property you should take time to do the research and factor in the additional costs that come with renting.

Reducing Your Negative Equity

To reduce your negative equity, it’s worth checking if your mortgage lender will let you overpay your mortgage. Mortgage overpayments mean that you will pay more towards your monthly mortgage repayments, helping to reduce your negative equity. You can either pay a one-off overpayment if you have savings, or you can choose to pay regular monthly overpayments.

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When it comes to selling or buying a house, make sure you use Compare My Move to help with every step of the way. We compare and connect you with verified and trusted conveyancing solicitors, chartered surveyors and removal companies. 

Martha Lott

Written by Martha Lott

Having written for Huffington Post and Film Criticism Journal, Martha now regularly researches and writes advice articles for everything moving house related.