In this guide the experts at The Mortgage Heroes discuss all the key information you need to know about negative equity. Find out what it means, how it happens, who it affects and more with this handy blog.
Your property is in negative equity if it is currently worth less than the amount you owe on your mortgage. A variety of reasons can cause negative equity, but the most common is falling property prices.
Equity refers to the value of your property that you own outright. In order to work out your equity you’ll need to get a valuation of your house to understand its current value as well as find out how much you still owe on your mortgage.
Once you have this information, you can then calculate your equity –
Current value of your property – outstanding mortgage amount = your equity in the property.
You will only be in negative equity if the value of your house falls below the amount you still owe on your mortgage. For example:
Let’s say you bought a house worth £150,000 with a deposit of £20,000 and a mortgage of £130,000.
After three years of living in the property you had paid off £15,000 of this mortgage. This means you still have £115,000 still to pay.
You get your house revalued and find that it is now worth £100,000.
This valuation would put you in negative equity of £15,000 as you’d still owe £115,000 of your mortgage on a house that is now worth £100,000.
Falling house prices as well as high loan to value (LTV) mortgages are the main causes of negative equity. If you bought your house with a small deposit, then you are at a higher risk of being in negative equity as you are more likely to have taken out a high LTV mortgage.
Interest-only mortgages can also increase the risk of negative equity. This is because you only pay the interest you owe each month and not any of the capital you’ve borrowed. You instead pay off the entire loan at the end of the mortgage term. This puts you at an increased risk because you’re not paying off your mortgage amount so therefore don’t build equity in your property.
Providing you continue to pay your mortgage payments and don’t plan on remortgaging or moving home anytime soon, being in negative equity won’t be a problem. You won’t be threatened with repossession nor have to pay extra charges just because you’re in negative equity.
Negative equity only becomes an immediate problem if you’re wanting to sell your home or remortgage.
Negative equity will mean that you’re selling your house for less than the value of the mortgage you took out to buy it. Your mortgage lender will want the full amount you borrowed from them to be repaid, so if there’s a shortfall between your mortgage amount and the price you can sell your home for, you’ll need to pay it off. Unless you have savings or other funds available to repay the difference, you might find it difficult to move.
You’ll also find it difficult to remortgage if you’re in negative equity. Lenders won’t lend you more than the value of your home, so if you owe £115,000 but your house is only worth £100,000, you’ll struggle to find a new mortgage deal.
If you keep paying your monthly mortgage payments you may soon be out of negative equity, either because the value of your home has increased or because you’ve reduced the amount you owe to below the value of your home.
If the conditions in your existing mortgage allow, then a good idea to try and reduce your negative equity is to overpay your monthly mortgage payments.
If you’re not looking to move house or remortgage, you can stay put and wait for the housing market in your area to improve. House prices do fluctuate but over the long term they do tend to increase, which means you’ll eventually be out of negative equity.
Making improvements to your home (updating your kitchen and bathroom, for example) can help to increase its value. Be sure to work out the costs and how much your house’s value will rise by before deciding if the investment is worthwhile.
If you’re currently in negative equity and are looking for reliable advice about what to do next, please don’t hesitate to get in touch with The Mortgage Heroes. We’re a leading mortgage broker helping to support people in all situations across the UK.
Contact our advisors today. We have years of experience in the industry and can provide professional support whatever your situation.
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