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Negative Equity Mortgage

Understanding negative equity and how to get out of it

published: 03 February 2023
Read time: 5 minutes

Most homeowners know that they want to avoid being in negative equity. But what does it really mean, exactly? If you find yourself in a tricky situation, what steps can you take to get out of it? Read our guide on negative equity mortgages to learn more.

What is negative equity?

Negative equity is when you owe more on your mortgage than what your home is currently worth.

Even if you sold your home, it wouldn’t bring in enough to pay off the mortgage, and you’d still be in debt.

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How does negative equity happen?

Negative equity normally occurs when a homeowner has a large mortgage on the home and the property then has a sharp drop in value.

Let’s say, for example, that you bought a home for £100,000 with a mortgage of £80,000. If the housing market crashed and the property’s value dropped to £70,000, you would then be in negative equity.

While this might seem unlikely, it does happen. Property is like any other investment in that prices can go either up or down.

Another way to look at this is with what is known as loan-to-value ratio (LTV). In the example above, the initial LTV would be 80% (£80,000 ÷ £100,000). If the property’s value falls to £70,000, the LTV rises to 114% (80,000 ÷ £70,000).

Once the LTV rises above 100%, you’re in negative equity. This means that you owe more than the home’s currently worth. This can leave homeowners feeling trapped with a property that they’re unable to sell or remortgage because of the shortfall.

How can I get out of negative equity?

There are a number of ways to get out of negative equity. Bear in mind, though, that there isn’t one quick fix.

  • Wait for house prices to rise: If the value of your home goes up, then the portion that you own outright will also increase. In turn, your loan-to-value (LTV) will drop. Once your LTV drops below 100%, your home is worth more than the amount you owe on it

  • Sit tight: If you’re not looking to sell or move, then being in negative equity might not be an immediate problem. As you repay your mortgage, as long as it’s not an interest-only mortgage, you will own more of the home outright

  • Overpay on your mortgage: By repaying more than you have to each month, you can reduce the amount you owe on your mortgage more quickly

  • Renovate: For example, you could look to improve the value of the property by extending or converting the loft. But this is risky, as it could leave you in more debt. In most cases, spare cash is often better spent paying off the loan

How do I avoid getting into negative equity?

If you’re worried about getting into negative equity, there are a few steps you can take to try and avoid it.

When buying a new home, make sure to compare house prices on the market. This way, you’ll be able to figure out whether you’re paying a fair amount of money for your property. If you find that the housing market is very busy, it’s likely that property prices will be at a peak. So, it may be worth holding fire until house prices decrease and become more affordable. What’s more, putting down a large deposit can be helpful, as you’ll need to pay back less money in the long run.

Once you own the property, in order to avoid getting into negative equity, you may want to consider overpaying your mortgage. Read the small print or get in touch with your provider to make sure your deal offers this possibility.

What is a negative equity mortgage and can I get one?

Negative equity mortgages allow you to transfer the negative equity to a new home. In other words, your debt moves with you.

Only a few specialist lenders offer deals for a negative equity mortgage. What’s more, the interest rates are usually high. You might also face early repayment charges on your existing mortgage.

What are the pros and cons of a negative equity mortgage?

As with everything, a negative equity mortgage comes with its own array of positives and drawbacks.

For example, a prominent advantage is that a negative equity mortgage allows you to move home without having to pay off any negative equity on your existing deal. This is especially beneficial if you have no option but to move house, whether for family or work reasons.

However, there are some negatives too. If you decide to take out a negative equity mortgage, you may have to pay an early repayment charge on your current plan. What’s more, you’re likely to have to cover the costs of extra fees, and your new mortgage deal may have higher interest rates than the one you currently have. In fact, very few providers offer this type of loan, meaning they are not forced to offer favourable, competitive options.

Can I sell my home when it’s in negative equity?

Selling your home when in negative equity will be costly. Since the sale price won’t cover the loan, you’ll still have outstanding debt to pay.

This is likely to rule you out of buying a new home. But if you move to rented accommodation or choose to share with family, your lender might be prepared to set up a payment plan to clear the remaining debt.

Can I remortgage when I’m in negative equity?

A lender will be unlikely to approve a remortgage deal, as they would need to lend you more than your home is worth.

It’s a tricky situation, especially when your current mortgage deal expires. This is because you will typically be moved to the lender’s standard variable rate. This often means payments will go up too.

How do I know if I’m in negative equity?

Sometimes, it may not be easy to realise whether you’re in negative equity or not.

Firstly, to check whether you are or not, you can look at your mortgage statement or get in touch with your lender to learn how much you still owe. Then, you may want to ask a surveyor or local estate agent to carry out a house valuation (which, of course, you’ll need to pay for).

Once this is done, if the value of your house is below what you owe, it’ll mean that you’re currently in negative equity.

What if I cannot afford my mortgage payments?

If you cannot afford your repayments, contact your lender as soon as possible. They may be able to offer alternatives to help make the monthly payments more affordable.

Don’t be tempted to stop all repayments, as you’re likely to damage your credit report and might not be able to access credit in the future. This means you may not be able to easily buy another home.

In the worst-case scenario, your home will be repossessed. It will then usually be sold quickly and often below market value.

The funds will be used to pay off your mortgage, but you will still be responsible for any shortfall. So, avoiding this scenario should be your top priority.

Being in negative equity does not necessarily affect your credit rating. The good news is that, provided you’re able to keep up with mortgage repayments, your credit score won’t be adversely affected.

Compare mortgage deals

Whether looking to buy or remortgage your home, it’s important to make sure you are on the best rate possible. Compare mortgage deals and get free mortgage advice with MoneySuperMarket.

Your home may be repossessed if you do not keep up repayments on your mortgage.

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