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. Why might be see a return of negative equity?
  3. What happens if your house is in negative equity?
  4. Can you sell your house with negative equity?
  5. Can you part exchange your house with negative equity?
  6. Can you roll negative equity into a new mortgage?
  7. My property is in negative equity, but I need to sell – what are my options?
  8. How do I know if my house is in negative equity?
What is negative equity

What is negative equity?

Negative equity occurs when your house is worth less than the amount you have outstanding on your mortgage. It 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, rapidly rising inflation and climbing 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 time period, at record high prices.

The market as already slowed significantly over the last few months, and many are predicting much steeper declines over the next 12 months. Current predictions range between a 5% and 30% fall in property values. Should the more pessimistic of predictions come to fruition, 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. 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, it’s important to remember that you will be paying off your balance and, at some point, you will once again have equity in your property, even if property prices don’t bounce back to the levels previously seen.

Can you sell your house if the value is lower than the mortgage?

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

If you need to sell your current property, and find yourself 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 part exchange my house with negative equity?

It won’t usually be possible to part exchange your house with negative equity. If you’re in negative equity, you’re unlikely to have the funds available to provide a deposit for your next property, and therefore would be unlikely to be able to secure a mortgage.

Part exchanging your house still involves the sale of a property and the settling of your mortgage account. If you’re in negative equity, your mortgage lender would still need to authorise a sale for less than your outstanding mortgage balance.

Can you roll negative equity into a new mortgage?

If you’re in negative equity when your existing mortgage deal ends, you’ll be unlikely to secure a new one. Instead, you’re likely to be moved onto the lender’s standard variable rate product. This will usually be at a significantly higher interest rate than your previous deal, so you can expect your monthly payments to increase. Homeowners who are trapped on a mortgage lender’s standard variable rate because they don’t have sufficient equity to secure a new fixed rate deal are referred to as ‘mortgage prisoners’.

What are my options if I need to sell?

We saw some cases of negative equity around the time of the 2007/2008 financial crisis, but it was on a relatively small scale. According to property experts, the number of households we see fall into negative equity over the next year or two could be far more extreme. They are also predicting that the impact for homeowners who find themselves in negative equity 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, and therefore will have few options when it comes to trying to make up any financial shortfall when it comes to sell.

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

How do I know if I’m in negative equity?

If you think you might be vulnerable to negative equity, it’s important to keep up to date with how much your property is worth. Online valuations can give you an idea of current property price trends, but you’ll need a formal valuation to know for sure whether you’re in negative equity or not. If you’re approaching the end of your current fixed rate mortgage deal, your lender will be able to tell you how much they believe your property is worth and what your options are for trying to secure a new deal. If you’re considering selling, the best way to get an accurate property valuation is to contact a number of local estate agents.

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 on your home and financial security, 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, as this will reduce the amount you owe, and if you’re in a position to make overpayments, even by just a few pounds a month, it is wise to do so. 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 way to look at the options appropriate for your individual circumstances.

 

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Author:

Danny Luke

Danny Luke

As Managing Director, Danny is responsible for the overall performance of Quick Move Now and provides strategic guidance and direction to all its employees. Danny is committed to making Quick Move Now the leading and most trusted home buying company in the UK.
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