Negative equity and mortgage are often used in conjunction with each other. But, what does negative equity mean for mortgage borrowers? How does it affect moving house or remortgaging? Find out how you can battle it and sources of available help.
What is Negative Equity?
First, it would help to understand what equity in a property is. It’s the total ownership you have in the property in terms of money. A perfect case is when the value of your house/flat/property is less than the mortgage secured on it. Therefore, you wouldn’t be able to even borrow small amounts on the basis of equity. For example, if your house had a purchase price of £200,000, the mortgage was for £180,000 and it’ll now sell for £150,000, you’re in negative equity. But, if the value of the property is £190,000, you wouldn’t be in reduced equity. Almost half of the millions of UK properties are suffering from this and some areas like Northern Ireland are more affected. There, every two out of five properties bought after 2005 have a sale price less than the mortgage on it.
How Do I Find Out If I’m in Negative Equity?
As it involves money, you may be swinging in and out of negative equity. You must find out your equity status. An effective way to keep check is:
- Ring up your mortgage lender and ask how much mortgage you still owe on your property, i.e. how much you’ve already cleared.
- Get a local estate agent or a surveyor (who might charge for this) to value your home. They will estimate an approximate sale value for the house taking into account recent housing market trends.
- Compare both values of the mortgage and sale value. If your house value is less than mortgage, you’re in negative equity.
What Are The Problems I Might Face With Negative Equity?
A few problems may arise with negative equity to make times tough. Let’s have a look at some of them:
- Selling your home:
It would be very difficult if you wanted to sell your home immediately due to some or the other reason like you’re moving abroad or simply want some money. The sale proceeds will be much lesser than your mortgage, so you’ll need to have savings to pay off the mortgage. Else, it’s almost impossible to move with less equity.
Remortgaging (switching to a cheaper or fixed-rate deal when the promotion period ends) can also become a challenge. Most lenders don’t let such homeowners remortgage when the existing deal ends. Instead, they move on to the lender’s SVR which is quite high.
How Can I Move House Even With Negative Equity?
As we saw above, moving house when you have less equity is an uphill task but not altogether impossible. Generally, several factors will affect how smoothly you’ll be able to move such as:
- The amount of negative equity
- Value of the property you want to shift to
- Whether you’re making regular payments on your existing mortgage
- How much deposit you can afford for the new property
You should talk to your lender for any help they can give you. A handful of UK lenders offer ‘negative equity mortgage’. That means, you can shift the negative equity in your previous house to your new house but you’ll still have to scrape up a deposit.
What Are the Pros & Cons of Negative Equity Mortgages?
These equity mortgages have more cons than pros. However, you can give it a try if there’s no option left.
- You’ll be able to move without paying negative equity on your mortgage. This is especially beneficial if you have to compulsorily move for work or family reasons.
- Early repayment charges may apply on the existing mortgage
- Extra fees and charges, not to mention higher interest rates on a new mortgage deal
- Not easily available
How Can I Rent Out My House With Negative Equity?
You could think of renting out your house even if you’re suffering from negative equity, although this would mean keeping your existing mortgage and paying a higher interest rate.
How Can I Reduce My Negative Equity?
You can surely reduce your negative equity with a few clever tips and tricks. One of them is to overpay your mortgage. But before that, check whether your mortgage lender is okay with overpayments and whether there’s an early repayment charge. Next, calculate how much you can afford to pay on-the-top every month or even as a lump sum. You can use a mortgage calculator available online or with lenders/brokers for this. This will give a rough idea about the difference your extra payments are going to make.
How Do I Prepare For An Interest Rate Hike When I Have Negative Equity?
No need to fear! Interest rates have maintained their base rate level of 0.5% since spring ’09. Yet, if they rise in future, it would become essential to assess whether you can still afford mortgage payments. It’s all the more important if you have negative equity as you’re at more risk of your home being repossessed.
Help! I’m struggling to pay my mortgage!
Talk to your lender and take advice from any of the debt advice charities below.
Northern Ireland: http://www.housingrights.org.uk/