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This time, we’re looking into ‘negative equity’, how it can make you feel trapped in your home, how it can occur, and what you can do about it.
Let’s get started by finding out more about negative equity.
Put simply, negative equity is when your property is worth less than the remaining value of your mortgage.
Fortunately, yes, there is a way. ‘Equity’ is another term for the value of your property that you own. To calculate your equity, you’ll need to know both of these:
By subtracting the mortgage amount from the current market value of your property, you’ll have an answer and that will be the amount of equity that you have in your property.
One of the most common reasons for people finding themselves in negative equity is due to falling house prices. At times when house prices go down, the number of properties that are deemed to be in negative equity will usually increase. This can be a problem for homeowners during a recession because house prices can drop dramatically.
Another common cause for negative equity can be interest-only mortgages. With these types of mortgages, you only ever pay the interest on the amount you borrow, rather than repaying the mortgage sum each month. The total amount you owe is repaid at the end of the mortgage. It’s due to homeowners not paying off their mortgage amount that means they’re not building equity in a property, so a decrease in property prices puts them at a high risk of being in negative equity.
A third way for people to find themselves in negative equity is when they’ve used equity release and the interest charged on the equity release surpasses the value of the property, meaning the homeowner owes more than the property is worth.
A real-life example of this was reported by ThisIsMoney in September 2021 when they explained that widow Jane Horton was handed a settlement figure of £996,572 after taking out a £384,000 equity release loan with her late husband in 2008. The figure included more than £500,000 of interest charges and a £96,000 early exit penalty fee.
This is a situation that is most likely to affect the older population. Research from Canada Life – an insurance and financial services company – showed that around a third of UK homeowners aged 55 and over with defined contribution pension savings were planning to release equity from their homes to boost retirement income. The research, which quizzed 506 UK adults with a defined contribution pension (and not yet drawing an income from it) revealed that over-55s with pensions valued above £200,000 were more likely to release equity (42%) than those with pensions valued at less than £200,000 (27%).
If you have used equity release, check the details to see if you are able to move the loan to a new property. You’ll also want to confirm if there is a ‘no negative equity’ guarantee. Without this, your beneficiaries could find that there is still money to be owed, even after your property has been sold.
The first thing to do is keep calm and think about the future. If the amount by which you’re in negative equity is a relatively small amount, it may well be the case that house prices climb and you’ll return to being in positive equity. If you’re not thinking about moving house right away, this is going to be a long-term option.
Alternatively, if you can afford to do it, try overpaying on your mortgage. This will help to increase the amount of equity that you have in your home, but be aware that there could be charges for overpayment.
Whatever your situation, obtaining professional financial advice can help you to get clarity on your particular situation and plan a way to improve your circumstances.
Here are four things to think about if you’re about to buy a property and want to avoid falling into negative equity.
As previously mentioned, these mortgages mean that the equity in your property could potentially remain low.
As we’ve covered in other articles (for example, see ‘Can I sell my house for £1 to a family member?’ – ARTICLE 00020), upon completion of a house sale, the lender must be repaid in full. Any lender that has a loan secured on your home will have their charges registered in order to prevent you from selling without first repaying their loan. So if you do need to sell your home and you owe more on your mortgage than the current value of your home, you will have to make up the difference between what you owe on your mortgage and the amount you make from the sale. If you don’t have savings or other funds available, it may be difficult for you to be able to pay this and so it could be that you’ll be unable to sell your property.
You may be able to include a guarantor on a new mortgage, but the guarantor will need to have the loan secured on their home, as well as yours. Obtaining an unsecured loan from your bank or building society could be a way to clear the negative equity, but it will be an expensive way of borrowing money. Alternatively, a bridging loan or a second charge mortgage could be short-term options, but these will be secured on your home so there’s a big risk of you losing your home if you’re unable to keep up with repayments.
If you are unfortunate to be in negative equity, it can be difficult for you to arrange a new mortgage when your current deal ends. If this is your situation, talk to your current provider and ask if you are able to re-negotiate a new deal with them. In the event that they are unable to offer you a new deal, you will be likely to be moved onto their standard variable rate when your current deal ends. You may want to stick with this if the new standard variable rate is lower. However, it’s important to remember that it is a variable rate and as such, the deal could change.
The best thing you can do is to speak with your mortgage lender as soon as possible; don’t bury your head in the sand and hope that the problem will go away. Communicating with them as soon as possible could mean that they have a solution that will help you to make your mortgage more affordable. You might also want to seek advice from Citizens Advice.
Does mortgage interest count towards my negative equity?
You should be aware that mortgage interest does not count towards your negative equity. Negative equity only pertains to the value of your home. If you are able to keep paying your mortgage’s interest, it will mean that you’re able to maintain your credit rating and have some options available to you in the future if the value of your home increases and you want to move.
We hope this article has helped you to understand more about negative equity and the ramifications it can have if you’re trying to sell your home. Before taking any action, you may want to contact an independent financial adviser to seek their expert advice.
If you have any questions about selling your property for cash, we’ll be happy to have a chat with you. Please call or send an email.