If you have a mortgage, negative equity can be frightening and confusing. We’ll look at the most common questions you might have, including what to do when you find yourself facing negative equity.
Your equity is the percentage of your home you own. This is calculated by combining your initial deposit and the mortgage amount you’ve paid. Negative equity arises when your property’s current value is lower than the amount of the mortgage you still have to pay.
Your property is an investment, and its value changes over the years. The main reason you may find yourself dealing with negative equity is fluctuations in the property market that reduce your home’s value.
The second key factor is the economy at large - when the economy isn’t doing so well, it’s harder to borrow and there are fewer buys around, causing property values to fall. Meanwhile, in a strong market, you can end up in a ‘property bubble’, where you overpay for a property that later ends up less valuable.
Thirdly, if you take out an interest-only mortgage that doesn’t require paying in instalments then you’re more likely to end up at risk of negative equity due to not reducing your debt.
To find out, you need to calculate the loan-to-value ratio.
Step 1: Ask your lender how much you owe on your property’s mortgage and the amount of equity you’ve accrued.
Step 2: Investigate the property’s current value, e.g., by arranging a home valuation visit.
Step 3: You are in negative equity if your property is currently worth less than what you owe. This means you have a positive loan-to-value ratio, when what you want is a negative loan-to-value ratio.
If you have negative equity, a sale will be unlikely to cover the amount left on your mortgage. Consequently, your provider will refuse a safe that is less than what you previously paid to purchase the home.
If you do go ahead and sell your home for less than the amount of your mortgage you have secured, then you will need to pay the difference to your mortgage provider.
Negative equity mortgages do exist, allowing you to pass the negative equity onto the new deal you secure. However, these mortgages have very strict standards and are uncommon.
If you’re worried about negative equity, there are five main things to consider:
Wait out the market: If you bought your property within the last few years, you may only be in negative equity because you’ve paid a very small chunk of your mortgage. If it’s an option, you might wait until house values rise to sell your property - a higher selling price will help you get out of negative equity.
Sell your property fast for cash: Finally, if you need a simple solution right now, a property buying company can purchase your home for cash. However, this is likely to only be the case if you’ve owned your home or over three years and bought it with a mortgage. If you wonder whether you qualify, give us a quick call any time.
Boost your property’s value: You can renovate and modernise your property to increase its value, helping you to sell for a higher price that gets you out of negative equity.
Rent the property: If your lender approves, you can rent the home and live in a cheaper rented property while you reduce negative equity by making money from the main property.
Increase equity: You can agree with your mortgage provider that you will make early mortgage repayments. This will quickly cut the total you owe and ultimately remove the negative equity.