According to research from a leading mortgage company, a house price drop equivalent to that seen in the last financial crisis could push almost half a million households into negative equity.
A fall of 18.72% in average house prices – the same as between 2006 and 2009 – would result in around 4% of properties owing more than the value of their home.
So, what is negative equity? How does it happen? And what can you do about it? Keep reading for your essential guide.
What is negative equity?
Negative equity occurs when the borrowing secured on your property totals more than the property value. For example, if you have a mortgage of £150,000 and your home is worth £140,000, you would have £10,000 worth of negative equity.
It isn’t just your mortgage that can cause negative equity. If your home is valued at £180,000, you have a mortgage of £170,000 and a secured loan of £20,000, you’d still be £10,000 in negative equity.
You can’t be in negative equity if you rent your home or if you don’t have any borrowing secured on it.
Five reasons you might be in negative equity
1. Falling house prices
If the value of property is falling, you could end up in negative equity. Falling house prices are the most common cause of negative equity. If the value of your home falls, it increases the likelihood that you will owe more than your home is worth.
2. Secured borrowing
As mentioned above, if you’ve taken a secured loan against your home in addition to your mortgage then you are likely to be at greater risk of negative equity. Perhaps you borrowed an additional sum to consolidate debts or to buy a new car?
3. You have an interest-only mortgage
When you have an interest-only mortgage, your outstanding balance doesn’t reduce as you make payments. Whether you have been paying your home loan for 10 months or 10 years, the balance will stay the same. This puts you at greater risk of negative equity if your property value falls.
4. You’ve missed mortgage repayments
If you have missed mortgage payments, then your outstanding balance could increase to a level higher than your property value.
5. You borrowed a high percentage of your property’s value
Before the global financial crisis, many lenders offered high loan-to-value mortgages. Many millions of homeowners borrowed 95% or even 100% of their property value, and so even a small fall in property values could push borrowers into negative equity.
Negative equity can often be caused by a combination of these issues. For example, if you have a high loan-to-value interest-only mortgage and the value of your home falls, you are at increased risk of negative equity.
How you can try and get out of negative equity
If you have no plans to move home or to remortgage then being in negative equity is not necessarily a problem in itself.
If you do find yourself in negative equity, then there are steps you can take to try and remedy the situation.
- Pay additional amounts to your mortgage. If you can make extra repayments to reduce your mortgage balance, then this may bring reduce your home loan to less than your property’s value.
- Be patient. If property prices rise, then you may find you once again owe less than the value of your home.
- Use your savings to reduce your mortgage balance. Mortgage rates are often higher than savings rates and so you could use your spare cash to repay part of your home loan.
- Increase the value of your home. There may be inexpensive ways that you can increase the value of your property. Redecoration, and refurbishment may require an initial outlay, but your home could end up being worth much more than you spend.
Negative equity and a remortgage
If you’re coming to the end of a special fixed or variable-rate deal or you are on your lender’s Standard Variable Rate (SVR) then you may be looking to remortgage to get a better rate.
However, if you are in negative equity then it’s highly unlikely that a new lender will accept you.
Your best option in this instance is to talk to your current lender to see if they have a rate that they can offer. They may have a range of products that are available to existing borrowers, but these may not be available if you owe more than your home is worth.
Negative equity and selling your home
If you are in negative equity and you want to sell your home, then there may be options available. Always remember that if you owe more than your home is worth that you will need your lender’s permission to sell.
If you’re selling and you want to buy another home, then your options will depend on how flexible your mortgage lender is about transferring your mortgage to a new property. Some mortgage lenders offer specialist products for people with negative equity to move home.
You may have to prove that you have a new job in a different part of the country, and you may still need to put down a deposit on the new property.
Depending on the difference in value between your home and outstanding mortgage, you could consider borrowing the money you need to clear the shortfall on your mortgage so you’re not in a negative equity position when you sell.
Do you have family or friends who could help you out? If not, you could consider taking out an unsecured loan although you need to be sure that you can afford the repayments. Bear in mind also that if you have a loan the repayments will be taken into account when a lender decides how much they will lend you for a new mortgage.
If you are selling your property and you don’t intend to buy another home then, again, you will need to speak to your lender. Depending on the amount of negative equity, your lender may come to an arrangement with you. Remember that even if you sell the property you will still be liable for the part of the mortgage balance that isn’t repaid by the sale.
Selling your home in the knowledge that you will not get enough cash to repay your home loan will break the terms of your mortgage can be expensive. Debt charities such as Citizens Advice or StepChange can give you further advice.