A Guide to Negative Equity

What is Negative Equity?

‘Negative equity’ is a term no homeowner wants to hear. But, what is negative equity and what does it mean if you find yourself hearing those dreaded words?

Since the recession, the term has become commonplace. The mere mention of negative equity can fill homeowners with fear and confusion. But, it doesn’t have to.

Negative equity is a term that’s used to describe the financial situation some homeowners find themselves in, when the amount they owe on their home, surpasses the current market value of the property. Once an infrequent situation, this scenario is becoming more common.

Example of Negative Equity

  1. Imagine purchasing a house for £200,000 with a 10% deposit, £20,000. (This means you owe £180,000 on the property)
  2. After a few months, properties in the area start to decrease in value and drop and the property is now worth £160,000 but, you still owe just under £180,000.
  3. This deficit results in you being in negative equity of just under £20,000 as you owe the mortgage company more than the value of your property.

So, who does it affect?

Generally speaking, anyone who purchased at the height of the property market boom in 2007, will have suffered the greatest levels of negative equity. Despite soaring prices in the South, 53 percent of properties in towns and cities in Britain are still below 2007 prices, according to statistics.

It’s important to understand that negative equity only affects those who own their own home with a mortgage. So those in rented accommodation need not worry, while those who own their home outright – with no mortgage – won’t be affected either.

Moreover, those who purchase properties with large deposits may not be as affected. But, as most homeowners buy their property with high loan-to-value (LTV) ratios, such as 85-90% loan after paying a 10-15% deposit, negative equity could be a concern.

Negative Equity is only an issue if something provokes a sale

If you purchased at the height of the property boom and find yourself in negative equity, it’s vital that you don’t panic. All in all, negative equity is generally only an issue if you find yourself needing to make a sale. For example, if you:

  • desperately need to upsize or downsize
  • are unable to afford the repayments, are in arrears, or at risk of repossession
  • find yourself at the end of interest rate rises, making repayments now unaffordable
  • are in the midst of personal circumstance changes, such as a relationship breakdown, unemployment, or moving overseas.

If you decide to wait and hope that property prices recover, patience is key. House prices may take some time to recover, if ever. If you’re uncertain what the best option for you is, we advise you to seek realistic and impartial advice from. This will enable you to make an informed decision about your future.

What can I do if I find out I’m in Negative Equity?

In the short-term

Negative equity is only an immediate problem if you need or want to sell your property. Strategies must be put in place to minimize the risk and/or debt in a sale situation. This involves liaising with the lender to discuss the options available to you. Your lender may agree to a consensual sale via a third-party purchaser and settle the debt on a full and final basis. It’s important not to panic, as there are options.

In the long-term

It’s vital you don’t rush into anything if you’re in a position of negative equity. In this case, we advise seeking realistic advice from professionals to discuss your long-term options.

Negative Equity specialists can help you:

  • devise a long-term plan based on future goals.
  • base your options on realistic and up-to-date comparable property valuation.
  • keep up-to-date and informed on property prices in your area and be realistic on whether they will reach the pre-crash levels.
  • assess how long it may take to recover from a negative balance – and estimate whether that will ever happen.
  • prepare for an interest rate rise and assess affordability in that circumstance.

Again, it’s vital you do not panic as there are options.

Can I sell my house?

In short, yes – as long as you have correct advice from professionals. Getting impartial and relevant guidance, and mediation from professionals will ensure you will effectively present yourself and your circumstances to the lender.

With the correct representation, the lender may allow you to sell in negative equity, with the remaining agreed debt settled post-sale. Nevertheless, the outcome is very much dependent on your circumstances and how the case is presented.

This is what makes it all the more important to speak to professionals.

If you need help with dealing with negative equity

Call us on 0330 159 5820,read our Negative Equity Solutions brochure or visit our website.