The UK has always had a property culture that favours buying over renting. Although the number of renters has increased in recent years, this is due to the rising cost of getting on the property ladder rather than a diminishing aspiration for property ownership in the population. The majority of renters want to buy because they see property ownership as a sensible investment for the future.
But what do you do when your biggest asset — your home — drops in value to the point where its value is less than the mortgage secured on it? Should you sell before it’s value reduces even more? Or should you wait for the market to pick up? What if you need to sell now? In this guide, we’ll take a further look into these issues and offer some practical tips for homeowners.
What Is Negative Equity?
If a property is worth less than the outstanding balance on the mortgage, it is in “negative equity”. This situation generally arises when there is a dip in the property market and house prices drop across the board. In 2014, after a major economic slump in the UK, the Independent reported half a million UK homes were in negative equity.
Negative equity is problematic for both lender and borrower. The lender no longer has sufficient security to cover the loan, so the homeowners cannot sell the property without paying back the difference. Yet for many people, selling at a loss and raising enough money to repay the bank is not achievable.
Remortgaging your home could also be problematic if the property is in negative equity.
Am I in Negative Equity?
Most people discover their property is in negative equity when they have their home valued in preparation for selling. Check the outstanding balance on your mortgage and compare this to the average valuation of your home (it’s advisable to request at least three valuations from independent agents). If the average valuation is less than the amount owed, you’re in negative equity.
You’re most at risk of falling into negative equity if any of the following apply:
- You bought a new build property with a government Help to Buy loan. New build properties typically sell for 15-20 per cent more than lived-in homes, so buyers who try to sell soon after purchasing are at risk of negative equity.
- Your deposit is the only equity in your home as you’ve just moved and are yet to start repayments.
- You paid a higher than average price for the property, due to competition in a desirable area of market fluctuations.
- A significant structural or environmental issue, such as flooding, has dramatically reduced the property’s value. You bought with a 95% or 100% mortgage so have accrued minimal equity in the property.
- You have an interest-only loan so will only accrue equity on top of the deposit if house prices rise.
What to Do If You’re in Negative Equity
Your best next steps depend on your objectives.
If you want to move:
- Check how much negative equity you have. A drop in value does not necessarily mean a property is in negative equity. However, if the value drops by more than the total equity you have in your home (the deposit paid plus the total sum of repayments made), you are in negative equity. The amount of negative equity is calculated by subtracting the property’s value from the amount owing on the mortgage. If the current value of your home is £150,000 and you owe £160,000 on the mortgage, the property is £10,000 in negative equity. If the property sells at the current market value, you will have to pay the bank the £10,000 difference.
- Talk to your lender. A homeowner must ask their lender for permission to sell if the agreed sale price will mean a return that is lower than the outstanding mortgage balance. Some lenders may be willing to offer a “negative equity mortgage” that allows the homeowner to transfer the negative equity to a new property. If moving is time-sensitive, this can be a helpful option, but remember to check if you will be liable to pay early repayment charges for your existing mortgage. The new mortgage may also have high-interest rates and this type of mortgage is fairly rare.
- Rent out your property. If you’re keen to move but unable to sell your home — at least not for a price you’re willing to accept — consider renting it out. You can use the rental income to continue mortgage repayments and to cover the cost of renting a smaller, more economical place for yourself. When the market picks up and the value of your property increases to a point where it is no longer in negative equity, you can sell it and repay the mortgage. Bear in mind that the rental income may not cover the mortgage and your living costs. It is also likely you will need to invest some funds into preparing the property for the rental market.
- Get a guaranteed cash sale. The fastest way to secure a guaranteed sale is to use a house buying service such as House Buyer Bureau. We buy all types of property in any condition or location. Once a firm offer is made, we can offer completion in as little as seven days, allowing you to move on from a home in negative equity and make a fresh start. Bypass the stress of selling on the open market and get a fair price for your home fast. Repay the lender any money owed and avoid being trapped in a property that could plunge further into negative equity.
If your mortgage deal is due to end:
- Talk to your provider. Most homeowners sign up to a mortgage deal for a fixed period of two or three years. When this period comes to an end, they must agree to a new deal with their current lender or look to switch providers. Many homeowners in negative equity struggle to negotiate a new mortgage deal because the loan has less value to the lender than it did when the property was worth more. If the lender is unwilling to agree to a new deal, you will automatically switch to the standard variable rate (SVR). This means your repayments will go up or down in line with changing interest rates.
- Use savings to reduce mortgage repayments. If your lender is reluctant to agree to a new deal you’re happy with, it may be worth considering using savings to reduce repayments. However, remember that if you’ve moved to an SVR rate, the monthly repayment amount will be unpredictable. Don’t leave yourself without any contingency funds to cover an unexpected rise in rates. Furthermore, be sure to check if your lender will impose any penalties for paying off a lump sum.
If you’re happy to stay put:
- Improve the property. It takes money to make money. Spending a little on home improvements could boost the value of your property and make it easier to sell. Increasing the value of a house by just a small amount could be enough to escape negative equity. However, it is likely that any value added will be offset by the investment required to make the necessary repairs or cosmetic improvements.
- Wait until the value increases. Negative equity is only a problem for homeowners who are keen to move on. If the value of your property drops but you’re perfectly happy where you are, at least in the short to medium term, staying put is an option. The property market continually fluctuates and there is a good chance that prices will rise again, bringing the house out of negative equity. Making overpayments on your mortgage could speed up the process but check what the limit for overpayments is before penalties are applied.It can take years for house prices to rise sufficiently to bring a property out of negative equity, so this is only an option for those who have no plans to move any time soon. Most people asking the question, “what can I do if my house value is less than what I owe?”, are really asking, “how can I sell my house if it is in negative equity?”.
If you have your heart set on a new home or are simply keen to cut ties with a property that is proving to be a money pit, contact our team of friendly property experts at House Buyer Bureau for a cash offer on your home. We offer a professional, quick and hassle-free way to sell your property and can release funds in as little as seven days after making a firm offer.