A Complete Guide to Negative Equity

The term ‘negative equity’ is one 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 start of the recession all those years ago, the term has been paraded around the media more than any other. 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 outstrips the current market value of the property. Once an infrequent situation, with property prices somewhat unsteady due to the hesitant property market, this scenario is becoming ever more common.

The best way to explain this is to imagine purchasing a house for £200,000 with a 10% deposit. This means you owe £180,000 on the property. After a few months, properties in the area start to decrease in value and drop by around 30%. This means that the property is now worth £160,000, but you still owe just under £180,000. 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 greatest levels of negative equity. In fact, according to statistics, despite soaring prices in the South, 53 percent of towns and cities in Britain are still below 2007 prices[1].

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. Likewise, if you purchased your home with a large deposit, you are unlikely to be affected by any dips. But as most home owners buy their property with a high LTV – such as 85-90%, 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 a decade ago 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 brunt 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 sit tight in the hope that property price may recover you must be prepared to wait potentially for some time – if indeed they ever do to the same rate as their 2007 peak. If you’re uncertain what the best option for you is, we advise you seek realistic and to the point advice. This will enable you to make an informed decision about your future and weigh up whether sitting tight or cutting your losses is right for you.

What can I do if I find out I’m in negative equity?

 In the short-term

As mentioned above, negative equity is only an immediate problem if you need or want to sell for whatever reason. In this instance, strategies must be put in place to minimise the risk and/or debt in a sale situation. This involves liaison with the lender to discuss what options are available to you. Your lender may agree to a consensual sale and settle the debt on a full and final basis. It’s important to not 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 options available in the long-term. From here, you can work together to:

  • devise a long-term plan based on future goals
  • base your opinions 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 levels pre-crash
  • 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 if I’m in negative equity?

 In short, yes – as long as you’re armed with the correct advice from professionals. Getting expert guidance and mediation from professionals will ensure you present yourself and your circumstance to the lender in the correct light. In this instance, the lender may allow you to sell in negative equity with the correct representation, with the remaining agreed debt settled post sale. Nevertheless, the outcome is very much dependent on your circumstances and how the case is presented. And this is what makes it all the more important to speak to professionals.

If you need help with dealing with negative equity, get in touch with us today. We’re experts in negative equity and are on-hand to guide you through the process from start to finish. Our experts are on hand to speak to you and provide a free initial consultation to point out your options.

[1] http://www.dailymail.co.uk/property/article-3553988/Homeowners-trapped-negative-equity-house-prices-stuck-2007-levels.html


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