What is Negative Equity & What Does it Mean for your Mortgage?
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 some people will be in negative equity without even realising. However, 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.
The global pandemic in March 2020 has greatly affected the process of both buying and selling property, ultimately slowing down the rate of communication throughout property chains. If you’re buying or selling a home throughout the pandemic, expect delays and a longer amount of time between the exchange of contracts and completion date.
Many sales, purchases and house moves were put on hold throughout 2020 affecting the housing market across the UK and resulting in house prices fluctuating. It has also resulted in many lenders altering or reducing their mortgage products due to the economic downturn. Before committing to a property sale, it’s advised that you speak to a mortgage broker or financial adviser to discuss what is available to you.
Don’t forget to check your local restrictions and any recent government announcements to ensure you adhere to any and all Covid-19 regulations.
What Does Negative Equity Mean?
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 the mortgage, meaning the equity value will also grow. However, if house prices were to fall, they enter negative equity.
This is when the property is worth less than the mortgage loan obtained by the owner.
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. If you’re thinking of selling your house, talk to a licensed conveyancer for their expert opinion.
You can use a free online valuation, do a check on Rightmove or Zoopla, 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.
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.
For example, if you bought a house worth £150,000 with a mortgage of £120,000, and your property is currently valued at just £110,000, you are 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 unlikely that your lender will approve. Your ability to get out of negative equity, or remortgage, will depend on the type of mortgage you have.
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.
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,
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. For example, Nationwide offers a negative equity mortgage to existing borrowers but applies strict criteria. It would be worth speaking to a mortgage broker or financial adviser before deciding.
You get the freedom of moving house without having to pay off your negative equity right away.
Negative equity mortgages are often subject to early repayment fees as you are ending your current mortgage early.
You can apply for a negative equity mortgage even if your current mortgage is with a different lender.
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.
How to Remortgage When in Negative Equity
Many lenders won’t approve your remortgage if you’re in negative equity. However, some lenders may allow you to include a guarantor on a new mortgage. This will likely result in the guarantor having to secure the loan on their own property as well as yours, so it is a decision not to be taken lightly. If this is the route you’d like to take, ensure your guarantor clearly understands the terms and conditions before applying.
There’s also the option of securing a bridging loan or second charge mortgage if you’re searching for short-term solutions. If you’re afraid of putting your home at risk due to these added loans, there’s also the option of clearing your negative equity by obtaining an unsecured loan from your bank or building society. It’s a rather expensive option but your property will be at less risk.
Before deciding which solution is best for you, it’s vital you speak to a mortgage broker, financial adviser or even your solicitor to ensure you’re fully informed. Securing other debts could put your home at risk of being repossessed so you must think carefully before deciding.
It's vital to instruct a solicitor for remortgaging to help with the process, especially so if you're in negative equity.
Help to Buy and Negative Equity
The Help to Buy Equity Loan is a government scheme that enables buyers to pay a small deposit of at least 5%, take out an equity loan for a proportion of the property’s value (usually 20%), and then take out a mortgage for the rest. The government will be the one to lend you 20% of the purchase price, or 40% if you’re buying in London. The first 5 years of this loan will be interest-free.
Whenever you’re purchasing a property with a small deposit, there will be a slight chance that a fall in house prices will put you in negative equity. However, with a Help to Buy Equity Loan, the government will be the one to own a share of the property, potentially putting you in a better position than you would be witha typical 95% mortgage should you fall into negative equity.
For example, should the value of the property drop from £300,000 to £250,000, the 20% that you would owe due to the Help to Buy Equity Loan will also lower.
Selling A House in 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 you borrowed. 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 your house is worth and thus how much you can sell it 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
This is the safest option. 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 - or they could deny you the right to remortgage at all. 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 letting gout 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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