The return of negative equity

‘Negative equity’ is a phrase we’ve not heard much in recent years. With the average UK property price increasing by 73% since 2012, it’s something few homeowners have had to deal with for more than a decade, but could that be about to change?

In this guide

1. What is negative equity?
2. What causes negative equity?
3. Why might we see a return of negative equity?
4. What happens if your house is in negative equity?
5. Can you sell a house in negative equity?
6. Can I remortgage in negative equity?
7. Can I part exchange my house with negative equity?
8. My property is in negative equity, but I need to sell – what are my options?
9. How much equity do I have in my property?

What is negative equity?

Negative equity occurs when your house is worth less than the amount you have outstanding on your mortgage.

What causes negative equity?

Negative equity is usually caused by a significant fall in property prices.

If someone buys a home at the height of a property market boom and finances their purchase with a high loan-to-value mortgage, they are vulnerable to their property falling into negative equity if property prices drop.

Why might we see a return of negative equity?

Strong and steady property price growth in recent years has meant that negative equity has been of little concern. However, a challenging post-pandemic global economy, high inflation and more expensive mortgage interest rates have many property experts worried that negative equity could be about to make a comeback.

Post-covid stamp duty measures and a shortage of available homes created an intensely overheated property market. Property prices rose by an average of more than 20% between March 2020 and August 2022, but that didn’t deter buyers. More than 2 million people purchased a residential property during that period, at record high prices.

Downward pressure from the wider economy means the property market is slowing and prices are starting to fall. Nationwide has recently reported a 3.8% annual drop in property prices – the largest drop since the fallout of the financial crisis in 2009. There are predictions of further significant price corrections. Should the more pessimistic predictions prove accurate, those who bought at the height of the market could easily find themselves in negative equity.

What happens if your house is in negative equity?

Being in negative equity is unlikely to become problematic until you need to secure a new mortgage deal or decide to sell the property.

If you’re concerned about the amount of equity in your home, you either need to try to pay more off your mortgage or increase the value of your home. In today’s economic climate, both of those things are likely to be a difficult prospect. If you can afford to do so, most mortgage lenders will allow you to make overpayments on your mortgage. Even small overpayments can make a big difference to your mortgage balance. Your usual mortgage repayments cover a combination of interest and capital, whereas any overpayments you make come straight off the capital, reducing how much you owe at a faster rate. It’s important to check how much you’re able to overpay in a single year without being liable for early repayment charges. A lot of lenders will allow you to overpay up to 10% of your outstanding mortgage balance, but it’s important to check with your lender.

If you’re not in a position to overpay your mortgage, you’ll need to weigh up your options. If you’re on a repayment mortgage, you will be steadily paying off your balance. At some point in the future your mortgage will be less than the value of your property, even if property prices don’t bounce back to the levels previously seen. However, if being in negative equity means you’re unable to secure an affordable mortgage product, you may fall into arrears. If you fail to keep up with your mortgage repayments, your home may be at risk of repossession.

Can you sell a house in negative equity?

If you’re in negative equity, you are still responsible for repaying your entire mortgage loan.

If you need to sell your current property but are in negative equity, it’s important that you talk to your mortgage lender to try to find a way forward. Your lender will need to authorise the acceptance of any offer that is lower than your outstanding mortgage balance, and you will still be responsible for repaying the debt even after the property has sold. Any unpaid debt after the sale is likely to be transferred to a personal loan.

If your lender will not approve an offer that falls below your outstanding mortgage, your only option would be to try to secure the funds to make up the shortfall another way.

Can I remortgage in negative equity?

It can be difficult to remortgage if you don’t have any equity in your property.

The majority of fixed-rate mortgages offer funding for up to 90% of the value of a property. There are a small number of 95% and 100% mortgages available, but no mortgage lender will be able to lend you more than 100% of the value of your home.

If you’re in negative equity when your existing fixed-rate comes to an end, you will usually be transferred onto the lender’s standard variable rate (SVR). You will likely remain on the SVR until you have enough equity in your property to qualify for a new fixed-rate product.

Homeowners who are trapped on a mortgage lender’s SVR because they don’t have sufficient equity to secure a new fixed-rate deal are referred to as ‘mortgage prisoners‘.

Although repayments on the lender’s SVR are likely to be more expensive than a fixed-rate mortgage product, being in negative equity on a house shouldn’t impact your credit score unless you’re unable to keep up with your repayments. If you struggle to afford the repayments on the SVR, it’s important to speak to your mortgage lender. There has been much discussion around mortgage prisoners in recent years and lenders are encouraged to support any mortgage prisoners experiencing financial difficulty. Missed mortgage can have a serious impact on your financial future and may put your home at risk of repossession. It’s important to speak to your mortgage lender as soon as you begin struggling, to avoid getting to that point.

Can I part exchange my house with negative equity?

It won’t usually be possible to part exchange your house with negative equity. Without equity, you’re unlikely to have the funds available to provide a deposit for your next property. This will impact your ability to secure a mortgage.

Part exchanging your house still involves the sale of a property and the settling of your mortgage account. This is unlikely to be possible if you have little or no equity in your property.

My house is in negative equity, but I need to sell – what are my options?

We saw some negative equity around the time of the 2007/2008 financial crisis, but on a relatively small scale. The number experts predict we might see over the next year or two could be far more extreme. They are also predicting that the impact for homeowners could be far greater.

In 2007 when the financial crisis hit, average property prices were around eight times the average UK salary. Today, they are more than 11 times the average salary. This means borrowing is at a much higher level and leaves homeowners more vulnerable should prices fall.

Higher levels of borrowing, without significantly higher wages, will limit homeowners’ options. Many homeowners are at full capacity in terms of lending affordability. This means they’ll have few options when it comes to trying to make up any financial shortfall to sell.

The best advice would be to contact your mortgage lender to discuss your individual circumstances or Citizens Advice.

How much equity do I have in my property?

If you think you might be vulnerable, keep up to date with how much your property is worth. Online valuations can give you an idea of current property price trends, but a formal valuation is better. Alternatively, you can ask your current lender how much they believe your property is worth. It will be their assessment that determines whether you’re able to secure a new fixed-rate deal with them. If you have limited equity in your property, staying with your current lender is often an easier option, so they’re a great place to start.

Conclusion

The idea of negative equity once again plaguing the property market is very worrying. If you’re concerned about the impact of falling property prices, you will certainly not be alone.

The best advice is to be proactive in doing what you can to protect yourself. Keep making your monthly mortgage repayments and, if you can, consider making overpayments. Even a few pounds a month will help.

It’s also important to point out that property price predictions are just that: predictions. Although we have an idea of where prices might go, based on previous patterns and likely outcomes, we don’t know how deep a price fall will be or how long it will last. If you are on a repayment mortgage, you will eventually move back into positive equity, so although the immediate future might be very challenging, there is a way forward.

Seeking advice from your mortgage lender or an independent financial adviser will always be the best first step. They will be able to look at your individual circumstances and provide tailored advice.

 

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