What Causes Negative Equity?
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.
Potential Problems of Negative Equity
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.
Selling a Home with Negative Equity
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.
Remortgaging with Negative Equity
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.