What is Negative Equity & How Can i Get out of it?
What is Negative Equity?
Put simply negative equity is when your property is worth less than the mortgage you have on it. A quick example would be, if you bought a property for £180,000 with a £150,000 mortgage, but now the property is worth only 140,000, you would be in negative equity.
An article published by the BBC states there are nearly half a million households that are in negative equity. Although this problem is widespread, it is more evident in Northern Ireland where over 40% of home-owners are in negative equity.
How Do I Know if I am in Negative Equity?
The best way to find out whether you are in negative equity is to first phone up your lender and find out how much money you still owe. The next step would be to ask your local estate agent or a surveyor to value your home. If your property is worth less than how much is owed then you are in negative equity.
What Can Cause me to go into Negative Equity?
Home-owners can find themselves in negative equity for a number of reasons & in some cases they are not to be blamed at all. You could be paying your agreed mortgage payment on time and the right amount every month but still find yourself in negative equity.
- House prices falling – This is probably the most common cause of negative equity. In 2008 when the financial credit crisis peaked and house prices crashed, home-owners with large debts found themselves in negative equity as their property was worth significantly less than it was prior to the crash.
- Interest only mortgages – An interest only mortgage is basically when you make payments on the interest on your loan every month but you never actually reduce debt. For example, if you have a mortgage of £150,000 even if you pay the interest on it for a period of 20 years, your debt will still remain at £150,000. These types of mortgages are high risk and can easily put you into negative equity if property prices fall.
- Extra borrowing – Taking out a second mortgage or a home-owner loan could also push you into negative equity. The more you have to payback, the greater the risk if house prices fall.
- Missing mortgage payments – Although this alone is not likely to push you into negative equity, if one of the above reasons were to come into play you may find yourself having to deal with negative equity.
Problems that Come with Negative Equity
There are 2 big problems that a home-owner will face if they find themselves in negative equity.
The first is one is you may not be able to sell your home. Because of the nature of negative equity unless you have some personal savings that you can use to repay the difference between the value of your home and the mortgage, you may find it hard to move.
The second is you will find it very difficult to re-mortgage. If you are coming to an end of a 5 year mortgage and you have found a better & cheaper rate, most lenders will not let you switch and will decline your application if you are in negative equity. They will see it as a risk and often just move you onto their standard variable rate.
I’m in Negative Equity – What Can I Do?
1) Reduce your Debt
Pull your savings together and see if you can use them to pay off some of the debt. If you have any family or friends who you know might help you, ask them.
Most mortgage companies allow you to pay 10% without penalty. If you can’t pay in a lump sum, smaller extra monthly payments can be helpful. Be sure to check your contract beforehand though.
2) Stay Put
Although in recent years because of the credit crisis the value of property has fluctuated, in Britain they tend to stay similar or move upwards. If it is viable for you, stay in your home and weather the storm – pay off your mortgage slowly. If trends stay the same you may find that you can avoid the debt because it will be decreasing itself as your property increases in value thus taking you out of negative equity.
3) Rent Out your Home if you are in Negative Equity
You may consider renting out your home and using the extra money generated to pay off your debt. This would mean you are changing the conditions of your mortgage so you would have to inform your lender and make an agreement with them as well as your insurer.
4) Boost the Value of your Property
If the amount of debt you owe just falls short of what you would get if you were to sell the property, try increasing its value. Look around your area, what type of properties are being sold? Ask yourself what do people in your area want in a property which you can add?
5) Get Professional Advice
It’s wise to ask a professional for help before doing anything as you could find yourself in even more debt if you are unsure of what to do. Speaking to a real professional with experience in what you are dealing with can help you overcome your situation or present solutions you yourself may not have thought of.
6) Sell and Repay What is Still Owed Over Time
This situation is not ideal but in the only option for some people. Keep in mind, you will have to get your mortgage providers permission before selling for less than the mortgage is worth.
7) Take Out a Specialist Mortgage
There are firms out there who will lend more than 100% loan to value against your home but be vary that this comes with many restrictions and can be very costly. We advise you contact an experienced mortgage broker/adviser before considering this route.
8) Allow your Home to be Repossessed
This should be more of a last resort, there are a few things to note if you go down this route.
- Public auctions for repossessed homes tend to attract lower prices than private sales which means you will have more money to payback if the sale goes through
- You will damage your credit rating
- A mortgage lender will be able to pursue you for up to 6 years regarding any unpaid debts.
9) Declare Bankruptcy
This is the worst option but may be the only one for some. It may be worth considering if you are under a mountain of negative equity and do not see yourself getting out of it for a long time.
By declaring bankruptcy you put yourself under many restrictions regarding your future. Some of these include not being able to borrow money for many many years, you won’t be able to act as director of a company, you may lose your job depending on which sector you work in and with all that said, your lender will still be able to take your home.
Be sure to seek legal advise before going down this route.
How can Housebuyers4u Help you Get out of Negative Equity and Move Forward with your Life?
Being in negative equity is tough as it’s not always clear what the best solution is. The stress of of it all can be very exhausting and is often the cause of many other unwanted problems for people. If you’ve decided to sell your house because of negative equity, here’s how Housebuyers4u can help.
We here at HB4u specialise in helping people who are in financial difficulties which includes negative equity.
We are genuine cash property buyers who will buy your house in any condition regardless of what situation the seller is in.
