13 Feb Help! How do I get out of Negative Equity?
Its always difficult when you find yourself in negative equity and having to sell or remorygage. We explain your options.
So what is negative equity?
Quite simply its when the the amount borrowed against the value of your property is greater than the price you’d be able to sell it for. So, for example, if the mortgage that you have outstanding is £150,000 and the the property is now only worth £130,000 then you’d have £20,000 of negative equity.
If you are a tenant and rent you home or if you own the house and there are no loans secured against it then it is not possible to be in negative equity.
What causes negative equity?
Even if you are making the required monthly mortgage payments you might still find yourself in negative equity.
Falling house prices
This is the most common cause of negative equity. In recent times the biggest price corrections occurred in the early 1990’s and 2008. The price crashes in these years suddenly meant that the house was suddenly worth less than the outstanding mortgage.
High loan-to-value borrowing
The loan to value is a financial term used by lenders to express the ratio of a loan to the value of an asset purchased. It’s normally a percentage figure that reflects the percentage of your property that is mortgaged, and the amount that is yours (the amount you own is usually called your equity). For example, if you have a mortgage of £150,000 on a house that’s worth £200,000, you have a loan-to-value of 75% – therefore you have £50,000 as equity.
The bigger the loan you took to buy your property, the quicker you’d be in negative equity in the event that house prices fall.
Why does negative equity restrict me?
Being in negative equity can have a pretty serious impact not only on your finances but on your life in general.
You won’t be free to remortgage
You may want to switch lenders at the end of a fixed term deal, however, you application is unlikely to succeed if you’re in negative equity. It may be possible to negotiate with your existing lender and get a new deal but its possible that this may not be the best terms available in the market. But it’s wise to have a plan B as the truth is a position of negative equity is not a great starting point.
Your existing lender may transfer you onto their standard variable rate (SVR) at the end of the current deal but the SVR tends to be more expensive. Additionally, the SVR does what it says on the tin and is exactly that – variable. If mortgage rates go up, so will your repayments.
However, as long as you are making the required payments in full and on time, the lender cannot repossess your home.
You may not be able to sell your home
Since you are responsible for the debt, unless you have the means to bridge the gap between the mortgage debt and the amount that you’d get for selling the house, you may not be able to sell. This may mean dipping into savings or getting a loan from a family member.
How can I get out of negative equity?
There are several options open to you once you understand what negative equity is and how you might find yourself in that situation.
If you are able to stay in your current home, consider the following:
Stay put and waiting for the market to recover
We’ve seen a few dips in recent decades but generally, and in the long term, the value of property in Britain trends upwards. Property has always performed well in the medium to long term so it may be worth just staying put and waiting for the market to return. Keep paying the monthly payments and over time your negative equity will erode by itself. If you can, batten down the hatches and wait for it to pass.
Overpay on your mortgage
This is a great idea. If you are on a standard variable rate then you won’t be subject to tie-ins or early repayment charges (ERCs). This means you are free to pay a chunk off your mortgage any time you like. If you don’t have the enough savings in the bank to do this, you should be able increase your monthly payments instead. Either option will result in paying your mortgage down quicker.
Even if you are midway through a specific mortgage deal, a fix or tracker for example, you will still be permitted to make some overpayments without having to fork out charges. Lenders usually allow overpayments of up to 10 per cent of their running mortgage balance in each year. Other lenders impose a fixed sum or employ their own more complex overpayment calculations. Call your lender to find out. But the bottom line is, if you can afford it, you can almost always pay your mortgage down quicker if you want to.
Take care of your castle
Making sure your house is well maintained and free from damage. Decorate and make any necessary repairs. Even though the property market may be dropping, its essential that you keep you own property’s value in line with the rest of the street. If you are in the position to make more major improvements to your home, for example, you work in the building trade, you could even add value.
Sometimes, there really is no alternative and you have to move when you are in negative equity. Here are some suggestions that you might want to explore:
Borrow the shortfall
See if a family member or friend could lend you the money to bridge the gap between your mortgage and your property value. You’d be free to pay the lender the amount that’s outstanding and move on. We’d always recommend a written agreement and payment plan just for the sake of clarity and good order.
Become a negative equity landlord
Think about renting out your home. If the market in your area is strong and the kind of home you have is easy to rent – a two-bed, two-bathroom flat near the station for example – the rental income might cover the mortgage or even provide a small surplus. Consult a local agent on the likely rental income that you’d achieve.
This plan is not without risk and there are some key points to remember. You must advise your lender and get their agreement. They may require that the mortgage be converted to a ‘buy to let’ mortgage. As buy-to-let mortgages come with bigger deposit requirements, this transition may not be workable – but it’s one worth exploring.
If you can prove you need to rent your home because of work commitments or financial hardship, your lender might agree to what’s known as ‘consent-to-lease’. It could still impose a one-off fee to make the amendment and could even raise your interest rate, so do your sums carefully.
Crucially you’ll also have to tell your insurer if you rent out your property as the terms on your existing policy will also have changed. There will be extra risks that the insurer will face if the property is rented which may mean that your existing residential household insurer simply won’t cover a buy to let. You’ll then have to change insurers but this is a million miles better than having a claim where your tenant is injured and the policy won’t cover you.
Take out a specialist mortgage
A spattering of mortgage lenders will take you and your negative equity on by lending more than 100 per cent loan to value against your new home. These deals are likely to be expensive and restrictive. If you are considering this route, your best bet is to contact an independent mortgage broker for advice.
Come to an agreement with your mortgage lender
Everyone’s circumstances are different but your lender may be able to help. There may be circumstances where your lender might transfer the negative equity balance to an unsecured loan. They may even write off the debt if it is cheaper than repossessing your home as the only alternative. This is quite extreme and might affect your credit score making borrowing in future much more difficult.
If you are struggling to pay your mortgage, alwasy speak to your lender and explain. They may give you a ‘payment holiday’ or extend the term of the loan making the payments a little less. There’s nothing to lose by calling a free and independent debt charity, such as Stepchange, to talk through your options.