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Negative equity mortgages

Understanding negative equity – and how to get out of it

published: 24 September 2020
Read time: 5 minutes

Most homeowners know that they want to avoid being in negative equity, but what does it really mean – and if you find yourself in a tricky situation, what steps can you take to get out of it?

What is negative equity?

Negative equity is when you owe more on your mortgage than 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.

Say 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 down as well as up.

Another way to look at this is with a term banks use, called loan-to-value (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 rise above 100%, you’re in negative equity – 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, but 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 – and your LTV will drop. Once your LTV drops below 100%, your home is worth more than 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: You could look to improve the value of the property by extending or converting the loft, for example. 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

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 negative equity mortgages and the interest rates are usually high. You might also face early repayment charges on your existing mortgage.

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

Selling your home when in negative equity will be costly. Because 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 because they would need to lend you more than your home is worth.

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

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.

Under 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. 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.

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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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