Negative Equity
Everyone hopes to have equity in their home, regardless of their reason for buying or selling. For many, a home is the most expensive asset they’ll own and nobody wants to be in negative equity. And while our reasons for owning a house aren’t necessarily driven by investment, the idea is that, over time, the home increases in value.
But what if it doesn’t? Or what happens when house prices dip, and you’re left with negative equity for your house? What even is negativity equity? Currently, there’s a lot of talk about house prices falling, and many homeowners are understandably concerned about what it may mean for them if they want to sell up.
Here, we aim to bring some clarity with this guide about whether or not you can sell a house with negative equity and what it all means.
What is equity?
Equity is the value of the property, less any money that you owe which is secured against it. So if you bought a home for £100,000 and borrowed £90,000, but the property is now worth £150,000, your equity is £60,000. Generally speaking, house prices have increased across the country over the last 10 years. Therefore, many people who bought a home at this time have seen their equity rise.
What happens when equity is negative?
Negative equity is when the property is worth less than the mortgage you have on it. For example, if you bought a property for £100,000 and have a mortgage on the property for £90,000 and that property is now worth £80,000, the amount you owe of £90,000 is £10,000 less than what it is worth, so you would have a negative equity of £10,000. It is rare but could become more prominent as house prices are expected to fall in 2023.
Who’s most at risk from negative equity?
People who are most at risk of negative equity typically owe a large mortgage on the home compared to its value. This is known as loan-to-value (LTV), which equates how much you paid for the property with your own money (the deposit) and the amount you borrowed from a mortgage lender.
In the last few years, the number of 95% LTV deals available on the market increased. Anyone with a 95% mortgage – where you pay a deposit equating to 5% of the home’s value and borrow the rest – is more at risk of falling into negative equity if house prices fall.
However, that doesn’t mean you will definitely fall into it if property values dip. Some analysts predict that prices may drop by 5% next year, while others have the figure higher. Either way, there’s no guarantee this will happen, and it doesn’t mean every house in the country will fall by the predicted amounts.
What happens if I go into negative equity?
Going into negative equity sounds scary, and it’s not ideal. But your own circumstances really dictate what happens. For instance, if you’ve just bought a home with a five-year fixed-rate mortgage and have no plans to sell, then falling into negative equity next year won’t impact you. Property prices tend to pick up relatively quickly, so it’s unlikely to be a long-term trend.
If your mortgage deal is about to expire, you may be slightly more concerned. With interest rates increasing (3% as of November 2022), your mortgage payments will likely be higher. If you’re remortgaging with negative equity, you might find it harder to find a new deal and may need to stay on the standard variable rate (basic interest rate the lender uses) with your current provider.
Can I sell a house with negative equity?
You’ll need to discuss the sale with your mortgage lender if you plan to sell a property with negative equity. You can only sell the property at a price lower than the money you owe on it if you have a mechanism to pay the amount back. If you try to do so, the lender can prevent you from selling during the conveyancing process.
Should I sell my house with negative equity?
In an ideal world, you’ll wait until you have equity in the home before selling it. However, not everyone can wait, meaning they’ll need to sell their home in negative equity. Again, you’ll need permission from the lender. Many mortgage providers don’t green-light sales if the owner has negative equity, so you may need to get equity in your home before selling.
Some lenders may offer a ‘negative equity’ mortgage, which sees them transferring the outstanding money you owe to your new property. Just remember that you’ll still need to pay a deposit on the new home if you’re selling to move to another property.
How do I get rid of negative equity?
If you find yourself in negative equity, all is not lost. So, how do I get rid of negative equity? You can take several actions to get out of it in your home. Some are more effective than others and require spending in some capacity.
Do nothing
You could do nothing. This is arguably the best option if you don’t need to sell your home. Dips in the market occur, but they aren’t usually long-term. If you plan on staying in the house for the long run, you can sit back, continue paying your mortgage (which will further help reduce it) and wait and see what happens in the market.
Pay off some of your mortgage
Another option involves overpaying on your mortgage. Most lenders allow for overpayments, which can help you reduce it so that you have more equity in your home. If you have savings, consider using some of them to pay off a chunk of your mortgage.
Rent out the home
Getting consent from your lender to let out the property while you move into a lower-priced rental home is another short-term option. The money you earn from the rent can help pay the negative equity.
Make home improvements
Home improvements are known to increase the value of a property. Some renovations, such as adding an extension, can add up to 30% to the home’s value. Again, if you have savings, you could potentially upgrade your home, increasing its value in the process. However, there is no guarantee that home improvements will increase the value, and you might be better off using your savings to overpay on the mortgage.
Get a loan
A loan can help cover the shortfall between the sale price and the amount owed on the mortgage. But taking a loan involves more risk, as you’ll need to pay back the mortgage and loan amount. Loan repayments also tend to have higher interest rates.
Can negative equity be a good thing?
Turning that negative into a positive. Negative equity can be an issue for homeowners, especially those that want to sell their property. But there are options to help reduce it, and it’s important to talk to your lender. If you don’t need to sell, however, waiting it out until property prices increase again might be the best scenario.
Last Updated: November 1st, 2024
