What is negative equity?
Negative equity refers to when the house or flat you have bought is worth less than what you paid for it. If negative equity occurs, it can make it more difficult to remortgage or sell your property.
What is equity?
The first question we need to answer is ‘what is equity?’. Equity refers to the amount of value you hold in a possession. It can also apply to ownership of shares in a company for example.
With mortgages, the equity you hold is the amount of your property that you own outright.
Sophie has a £200,000 mortgage to be repaid over 30 years. Sophie will have to repay £556 per month (interest not included) to repay her mortgage in this time.
What does negative equity mean?
Negative equity happens when something you have bought is now worth less than what you paid for it. This can also apply to financial agreements such as mortgages or car finance, where the money you still owe is more than the value of the property or car.
Matt buys a home with a mortgage of £250,000 when property prices are high. Property prices slowly decrease and 3 years later property prices in this area suddenly drop significantly. Not including interest, he has only repaid £2,500 of her mortgage at this point (25 year mortgage).
What is negative equity on a house?
It is possible for your property to fall into ‘negative equity’ over time. This happens when the amount of money your property is worth falls to less than your remaining mortgage balance. This can happen for various reasons including:
- Property prices have fallen in your area
- You have borrowed more against your mortgage
- You have released equity from your home
- You bought your home when prices were unusually high
- There has been damage to your home e.g. structural issues, subsidence
Am I in negative equity?
It is easy to quickly check average house prices in your area. There are various tools online for this and you will usually be able to get a rough estimate by looking at similar properties on Zoopla or Rightmove.
If property prices seem to be on a downward trend, your home might be at risk of falling into negative equity. It is possible your property is already in negative equity. The best way to know for sure would be to get your property valued, but this can be costly. If you’re not planning on selling any time soon, an official valuation may not be worth the hassle or fees.
What happens with negative equity?
It will be disappointing to realise the property you have invested in is worth less than when you bought it. You have a few options if you find your home or rental property has fallen into negative equity. You can:
- Switch to capital and repayment from interest only, as interest only mortgages will never reduce your mortgage balance: The only way to increase the value held in your home is to renovate or switch to repaying your mortgage each month. You should only do this if you can afford to pay more.
- Downsize to a smaller property (rented) and use the money made from selling your property to repay as much of your mortgage as possible: This should not be your first option as doing this can negatively impact your credit score. The rent for your new property could also leave you without much extra cash to repay any additional balance on your mortgage.
- Renovate your property (if possible) as this will increase the value of your home: This could help regain some of the lost value in your property. Not all renovations will add value to your property though, so it is best to do some research before spending more money.
- Make overpayments on your mortgage to try and reduce your mortgage to less than the value of your property: Check your lender’s policies for overpaying as your mortgage may have yearly limits. If you overpay too much, you can actually lose money as you will be stuck with early repayment charges (fees).
- Wait and see what happens: If you’re not in a rush to sell your property or remortgage, you can simply wait and see if house prices in your area increase.
Note: All these options are big financial commitments, so it’s best to think carefully and get proper advice before making any decisions. A qualified mortgage expert will be able help you work out your best options. You should also speak to your lender to find out more about the options available to you.
Can I remortgage with negative equity?
You will likely find it harder to remortgage with negative equity. When you remortgage, your lender will assess the Loan to Value (LTV) ratio of your mortgage.
This assesses how much of your property you own vs how much the lender owns. If you are in negative equity, your LTV can rise above 100%, meaning the lender owns more in mortgage than the property is worth.
If your mortgage is suddenly worth far more than your property, this will make lenders hesitant to agree to a remortgage. Most lender’s affordability criteria won’t allow you to switch to a new deal.
Note: If you are on a fixed rate and your mortgage deal ends, you will be switched to your lenders Standard Variable Rate (SVR). This could lead to higher monthly repayments due to an increase in interest.
More about remortgages:
Selling a house in negative equity
Selling your house will be tricky if your property is in negative equity. Selling your house will not generate enough money to repay your remaining mortgage balance. You will still have mortgage left to repay on your old property, unless you have enough saved to cover this amount.
Whether moving house is an option for you will depend on:
- How much negative equity your property is in (if it is only a few thousand £s, you may have enough savings to repay the difference)
- Do you have enough money for a deposit? (You won’t be able to use the equity in your current home)
- Are you up to date with your mortgage payments?
You may be able to get what is known as a ‘negative equity mortgage’. This is where your lender agrees to allow you to transfer the debt owed on your current mortgage to a new property. These mortgages are far harder to find than a standard mortgage and won’t be available with most lenders.
If you need a negative equity mortgage, you should speak to a qualified mortgage broker for help and guidance.
More about mortgages:
What should I do with a buy to let mortgage in negative equity?
If you are a landlord or investor and one of your properties is in negative equity, you have a few options:
- Sell the property: You could cut your losses and sell, using savings or other resources to repay the remaining mortgage balance.
- Increase rent: You could increase the rent charged on the property. You can use the increase profit to try and repay more of the remaining balance faster.
- Renovate the property: You could improve the property to increase it’s value. Be sure to only make changes that will notably increase property value e.g. new bathroom or kitchen
Avoiding negative equity
A good way to avoid negative equity is to compare house prices when you buy. You should look at prices of similar properties in your area plus prices in recent years.
This can give you an indication of if you are paying a fair price. You will also be able to see if property values have been decreasing in the last few years. Paying a larger deposit can also be helpful, as you will immediately own a higher percentage of your property.
If pricing is high and you can afford to wait, this may be a better option. Otherwise, you could pay more than you want to and find yourself losing out a few years down the line.