What is Negative Equity on a House?
19/04/2018
Negative equity on a house or flat describes when the amount of money you owe on your property - typically your outstanding mortgage - is greater than the sale value you'd expect to get if you were to sell it now.
Negative Equity Example
Lets say you bought a property for £200,000 with a mortgage of £180,000 two years ago.
If the property fell in value such that it's only worth £100,000 today, you are in negative equity.
Say you paid off £20,000 from the mortgage in the 2 years, if you chose to sell up, you'd be left owing £60,000 but with no equity to show for it.
It's important to note that negative equity isn't actual debt but potential indebtedness.
Negative equity can lead to these situations:
- you may be unable to sell your property because what you get from the sale won't cover your outstanding mortgage (and other costs of sale); and
- if you lose your job and your house is repossessed, you'll be in that much more debt to your lender; the greater your mortgage's loan to value, the worse this situation would be.
The number of people who suffer from negative equity - or potential indebtedness - normally increases when property prices are falling. In 2009, after the last UK property crash, as many as 1.1 million people were in negative equity, according to some estimates. In April 2018, UK house prices overall started to fall, bringing back fears of negative equity, particularly for first time buyers 'mortgaged to the hilt' with 95% mortgages.
This article considers:
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In Negative Equity but need to sell your home?
Our experienced negative equity sale solicitors can help and advise you.
*Fixed Fee – No Sale No Fee – On all Mortgage Lender Panels
Want help now? Call us on 0333 344 3234 (local call charges apply)
The situation is always more dangerous the greater the loan to value ratio of your mortgage. You used to be able to get 110% mortgages and the crash was one of the reasons why you no longer can, because of the debt disasters suffered by people who took out these kind of mortgages and were subsequently repossessed.
Property prices in the UK have risen to stratospheric levels since the last crash; this has resulted in various schemes, such as Help to Buy, which have attempted to make houses more affordable.
The trouble is this has once again increased the availability of higher loan to value mortgages - there are many ways in which a first time buyer can take out a 5% deposit mortgage for example - no problem when prices are rising, but as of April 2018, prices are being seen to fall once again in many areas. This has caused many first time buyers, who've resorted to high loan to value mortgage products to enable them to buy, to fear being trapped in negative equity.
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How do you find out if you're in negative equity?
If you're worried about whether you're in negative equity or at risk of being so, you should:
- Find out how much you owe on your mortgage by contacting your lender.
- Find out the value of your home. You can get a rough idea by checking out an online property website. You can go further and ask a local estate agent or surveyor, however they may charge you for this.
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What should you do if you're in negative equity?
You don't need to do anything.
The most important thing to do is ensure that you keep your job and so keep making your mortgage repayments.
The moment any issue arises with your income you must contact your mortgage lender at once. Lenders only repossess as a last resort but they are always more favourable in their treatment if you approach them first to discuss your financial situation.
Did You Know?
The Mortgage Conduct of Business Rules points that a lender should “deal fairly" with homeowners in arrears.
You can use insurance to guard against loss of income; there are products such as income protection insurance and mortgage protection insurance which can keep up your mortgage repayments for a specified period.
Click to get a free quote for Mortgage Payment Protection Insurance or call us on 0333 344 3234 to find out more
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What if you have to consider selling house in negative equity?
You may find yourself in a life situation where you actually have to move when in negative equity. This might be because, for example, you've found a new job or your current job requires you to relocate or something family-related requires this action.
As before, your first action should be to consult your mortgage lender. You should discuss any available schemes which might allow you to borrow more than 100% of the value of your new home should you move.
There's no hiding that risk element becomes higher - it may not be cheap because not least, you'll end up paying a significantly higher interest rate on your mortgage. Please note also that some lenders won't let you move to a new build, shared ownership or shared equity property and take your mortgage with you if you’re in negative equity.
Other strategies might include renting out your home (with your lender's permission) while, for example, living cheaply with relatives or friends. You should note, however, that your lender may impose higher interest rates on your mortgage because it becomes a buy to let product.
There are many other costs involved with becoming a landlord such as having to get an Energy Performance Certificate, buy-to-let insurance and gas certificates.
Click to read what you need to know about buy to let to find out more.
According to the Mortgage Conduct of Business Rules, you lender must "give consideration to the customer being allowed to remain in possession to effect a sale". If you simply can't afford to live in your house, your lender must consider allowing you to sell up regardless of whether the sale price covers the outstanding mortgage.
Lender refuses permission to sell? You can take them to court
You can apply to the the county court for an order for sale under the Trusts of Land & Appointment of Trustees Act 1996.
If you're successful, the court can order a sale regardless of the lender's wishes.
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What happens if you face repossession?
Being repossessed is probably the most extreme thing that can happen as a result of negative equity.
It is, however, not a rapid process and your lender has to work with you as much as possible to avoid the eventuality.
To find out more, please read our article What Happens When you get Repossessed: The 7 Stages
In Negative Equity but need to sell your home?
Our experienced negative equity sale solicitors can help and advise you.
*Fixed Fee – No Sale No Fee – On all Mortgage Lender Panels
Want help now? Call us on 0333 344 3234 (local call charges apply)
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