What Happens If A Property Falls into Negative Equity?

Importantly, there are charities in the UK like MoneyHelper who can help you get through a period of negative equity should you need their support.

What does it mean if your property is in negative equity?

If your property is in negative equity it means that the value of the property is worth less than the mortgage you have on it. Negative equity is normally caused by falling property prices and can depend on a number of factors including location. Roughly half a million properties in the UK are in negative equity and it is more prevalent in certain areas.

How do you know if you are in negative equity?

You may not know if you are in negative equity and will need to find out how much of your mortgage you have left to pay off and the current value of your home. If the value of your property is lower than the amount you owe, it means that you are in negative equity.

Samuel Davies of Kallyss commented: “falling into negative equity can be difficult and can in fact be very scary. However, it is important you remain calm and speak to your mortgage lender who should be able to assist and advise you.”

The prevalence of negative equity is typically higher in areas where home values have declined. Those who might be especially vulnerable are those who have only recently purchased their home, those who bought with a 95% or 100% mortgage (meaning they had less equity in the home to begin with), those who paid a premium for the property, those with interest-only loans or those who have bought in areas suffering from long-term economic impact.

Why is it bad to be in negative equity?

Being in negative equity can be a bad thing if you are looking to sell your home as it makes it more difficult and more expensive to move. You will need to pay the difference between the value of the home and the mortgage in order to move home.

It can also be problematic if you want to remortgage as the majority of lenders will not allow those with negative equity to switch to a new mortgage deal. If you have negative equity, it is likely that at the end of an existing mortgage deal you will be moved onto a lender’s standard variable rate and subject to their specific rates.

What can you do if you are in negative equity?

If you have fallen into negative equity, there are different options available to you depending on your specific financial circumstances and what your future plans are.

• If you want to stay in your current property

If you want to stay in your current property, your best course of action may be to continue making regular mortgage repayments as, over time, you will build up the amount of equity you hold. You should consider, if it is financially possible, to make over-payments if your mortgage deal allows it; this means that you pay off your loan more quickly and build up equity faster.

You could also add value to your property by adding desirable features or undergoing a renovation; however, this can be a big investment and you could stand to lose more than you gain.

• If your mortgage deal expires

In normal circumstances, if your mortgage deal comes to an end, you might consider remortgaging; however, if you are in negative equity then your options to do this may be limited. It is unlikely that your mortgage lender will offer you a new deal and instead you are likely to move onto the lender’s standard variable rate – this will usually make your monthly repayments more expensive. Before moving onto the standard variable rate, you will need to ensure that you can meet the new repayment plan over a long-term basis.

• If you are looking to move house

You should always try and avoid selling your house while you are in negative equity – if the house value is lower than the loan amount, you will have to make up the difference and will be out of pocket.

If you sell a property while in negative equity, it means that not only will you not make a profit but you will also lose the deposit that you paid. This puts you in a difficult position if you are wanting to buy a new property straight away.

There is such a thing as a ‘negative equity mortgage’ which allows you to transfer your negative equity to a new property and save you from repaying the debt; however, only a few specialist lenders will offer this option and you are likely to have to pay an early repayment charge and high interest rates.