Negative equity in your home
What is negative equity?
Negative equity in your home is when your property is worth less than your mortgage and other debts secured on it. It’s usually caused by falling property prices and often related to the state of the economy.
As an example, if you bought your home for £180,000, with a mortgage for £150,000 and the property is now only worth £100,000, you would be in negative equity.
Other circumstances that may lead to negative equity are when:
- You recently bought your home, so your only equity is the deposit you paid
- You paid a premium for the property, when the market was buoyant and prices peaked
- Something happens to the property to drastically reduce its value
How can I find out if I’m in negative equity?
It’s a good idea to ask a local estate agent for a free house valuation – if you know how much is outstanding on your mortgage, you can work out if you’re in negative equity.
Should I be worried?
Being in negative equity is only really an issue if you want to sell your home. But if you are up to date with your mortgage and secured loan repayments, you shouldn’t treat negative equity as an immediate problem.
It can be tricky if you want to remortgage to a fixed rate or a cheaper deal. Many lenders will not let people with negative equity switch to a new mortgage deal after their existing one ends. Instead, you are likely to be moved onto the lender’s standard variable rate.
What should I do if I’m in negative equity?
You don’t need to do anything. As long as you keep up with your monthly mortgage payments, you may soon be out of negative equity – either because the value of your home has risen, the economy recovers or because you’ve reduced the amount you owe to below the value of your home.
I was hoping to sell my house…
As long as you get permission from your lender, you may still be able to sell your home. You will need their agreement as they can stop a sale going through if the sale price will not cover the outstanding mortgage.
Talk to your lender. In some cases, they may agree to allow you to sell and then transfer the negative equity amount to your new mortgage.
According to The FCA Mortgage: Conduct of Business Rules, a lender must “deal fairly” with anyone in arrears. It also says the lender must “give consideration to the customer being allowed to remain in possession to effect a sale.” So if you can’t afford to stay in your home, your lender should consider allowing you to sell the house yourself while you are still living there.
Check whether they offer any schemes to help with negative equity, such as a ‘negative equity mortgage’ which allow you to transfer this to your new property – although you will still be expected to pay a deposit.
How will negative equity affect my finances?
If you’re not planning on selling your home, negative equity won’t necessarily affect your credit score, unless you default on your payments or need to move house and cannot make up the shortfall.
If you’re staying in your property and keeping up your mortgage payments each month, negative equity isn’t likely to affect your everyday finances.
Nor will it impact on your credit score unless you miss mortgage payments or need to move home and can’t make up the shortfall. Take a look at Mortgage Shortfalls if you’re concerned about this. As long as you’re paying your mortgage and other secured debts every month, you won’t need to worry about your home being repossessed.
If you find that you’re struggling with finances and having problems balancing business and personal expenditure, we may be able to help you make things easier. Give our friendly team a call on 0800 280 2816.
Can I get out of negative equity by renting?
You could choose to rent your property out, as long as your lender approves. If the rent is more than your mortgage payment, this could give you extra money (after tax) to pay towards reducing your outstanding mortgage.
Some lenders add an extra percentage or two to the mortgage interest rate in exchange for allowing you to rent out your property. If this will cause you hardship, you could try asking them to waive this.
Make sure you check the small print of your buildings and contents insurance if you are thinking about this doing this.
Get free debt help
If you are worried about your finances, or find yourself in the early stages of debt, we may be able to help you find a solution. When you’re running your own business and facing money problems, we’re here to support you, by giving you free debt advice and a clear idea of your options. All you need to do is call 0800 280 2816 or fill in the online form.