What is Negative Equity?
In the world of property, negative equity is almost a taboo term and, most definitely, one that most people do not want to have to use to describe their own situation, but what is negative equity?……
After all, negative equity denotes the circumstance when your mortgage (and ultimately the money you’ve borrowed to purchase your house) is higher in value than the value of your property itself.
This type of situation is usually caused by falling property prices, although, can occur in other circumstances where somebody increases their mortgage to borrow more money, perhaps for an extension or another home development project.
How do you know if you’re in negative equity?
Whether or not you previously had a strong understanding of the negative equity definition, you may not know if you are living in a house in negative equity, however, negative equity is more common amongst homeowners than you may, at first, think.
According to The Money Saving Expert, there are around half a million properties in negative equity in the UK. And in Northern Ireland specifically, up to 2 in every 5 properties bought after 2005 are in negative equity.
You can work out whether you are in negative equity by finding out how much you owe your mortgage lender. This can be done through your personal online banking system or by phoning your mortgage lender and speaking to them directly.
Once you have found out how much money you owe on your mortgage, you’ll need an estate agent, or another property valuer, to value your property.
Once your property has been valued and you know how much you owe, you’ll know if you are in negative equity or not. Ultimately, if the value of your house is lower than the amount of money you owe your lender, you are in negative equity.
Can you sell a house that has negative equity?
Nobody wants a situation whereby they are in negative equity with their property since negative equity suggests a debt that is near impossible to pay back.
One of the first problems that arises from negative equity is selling a house that has a negative equity, particularly for those people that do not have enough savings to pay the difference between their current property price and the price of their new property. This means that moving home is impossible in some cases.
Additionally, mortgage lenders are very unlikely to allow property owners to change their mortgage (to a cheaper interest rate or fixed rate, for example) when they’re in negative equity.
How to reduce the negative equity in your house
Although it isn’t easy, it is neither impossible to reduce the negative equity in your house. You can do this by making over payments on your mortgage.
Overpaying your mortgage to reduce negative equity
Making over payments on your mortgage can reduce the amount you pay back overall to your mortgage lender and reduce the amount you are paying in interest and so on.
There are, however, maximum rates mortgage lenders will allow you to overpay on your mortgage, so it’s best to check if you have any over payment penalties associated with your mortgage beforehand.
Selling a house with negative equity
It is generally more difficult to move house when you have a property in negative equity. However, your house move will depend on a number of factors. These include: The price of the house you would like to move to, your previous repayment history and how much deposit you can pay on your new property.
It will evidently be much easier to move to a house that is of a lower value than your current (negative equity) property. Generally, moving to a house that is lower in value will mean downsizing or moving to an area with lower property prices.
A good situation would be to own enough of your existing property to buy your new property outright. This is not always possible and your move will depend on how much deposit you can raise on your new home.
It will be easier if you have a good past history of making repayments on your mortgage and if your existing mortgage is up-to-date.
It is possible, although difficult, to obtain a negative equity mortgage, which is a mortgage whereby you can transfer your negative equity to your new property. This is suitable for those who have to move immediately. However, this route could involve an early repayment mortgage charge, and other additional charges.
Dealing with an interest rate rise when in negative equity
An interest rate rise can be particularly problematic for people with negative equity. Your mortgage lender should make you aware that an interest rate rise is a possibility when you first take out your mortgage, which will mean your monthly mortgage repayments could rise significantly.
The current interest rate is 0.25%, however, there is always a possibility that the interest rate will rise. A mortgage lender should show you how much your monthly repayments could rise to if interest rates reach around 11%. Scarily, it was interest rate rises that caused the property crash in 2007 – 2009 when thousands of people saw their homes repossessed.
What you can do if you’re struggling to pay your mortgage
If you are struggling to pay your mortgage you should make sure you speak to your mortgage lender who will want to help you pay off your mortgage.
Your lender can look at when and how you make your payments. The solution may even be as simple as extending your mortgage term, so that your regular monthly payments are reduced.
Can I make voluntary repossession because of negative equity?
Although it is possible to make voluntary repossession because of negative equity, this solution is not often recommended as one of the best negative equity mortgage solutions.
Voluntary repossession will give you a bad credit rating, for a minimum of five to six years, and will therefore make it more difficult for you to take out a future loan.
In addition, repossessed homes tend to gain less profit than private house sales. What’s more, your mortgage company will be able to contact you for a further six years after your home has been repossessed for outstanding debts [HomeOwners Alliance].
Quick Move Now can stop your home being repossessed, so that you can take the stress of negative equity out of your life, with minimal effect on your future options. Whether you have individual or shared ownership negative equity, want to get rid of your mortgage negative equity or want to explore your negative equity options, Quick Move Now may be able to help you.