What to do if You Fall into Negative Equity

Home equity is the portion of your home that you already own. It is calculated by taking the current value of your home minus any deposit and repayments you have made up to that point. However, you’ve likely heard the term ‘negative equity’ used in relation to mortgages.

We explore what negative equity means, how you fall into it, and how best to avoid this issue when buying your home.

What is negative equity?

Negative equity is where your mortgage balance is higher than your home’s current value. For example:

You buy a property at £200,000 with a 5% deposit (£10,000), your home value is reassessed to be £185,000 after 3 months. As you borrowed £190,000 your home is now worth less than you owe

There are a few circumstances that can cause you to fall into negative equity:

• Most commonly, a significant drop in property prices across the market generally or ‘property market crash’ can push you into negative equity

• Using a 100% mortgage or particularly small deposit (typically 5% or less) makes you more vulnerable to fluctuations in property prices. Offering the largest deposit you can afford will reduce your potential for negative equity

• Falling into mortgage arrears for a substantial period of time

• Allowing your home to fall into disrepair, which can result in a reduction in value

• Changes in the local area beyond your control, such as a new retail park nearby that would increase traffic or problematic neighbouring properties could lower your property value

Your options if you fall into it

Negative equity is an intimidating term, but it only really becomes an issue when you want to make a change to your home finance or move home. Generally speaking the best thing to do is wait. The property market will weather price drops and they will eventually rise again, balancing out your equity level. You will also usually eventually close the equity gap as time passes and you repay more of your loan.

However, if you are planning to make a change while in negative equity, this can be challenging. Here are a range of options available to those experiencing negative home equity, and how best to navigate them:

Work towards reducing your mortgage balance

The easiest option when you’re in negative equity is to stay where you are and work on reducing your balance and bridging the gap between what you owe and your home’s value. There are a number of ways to do this:

1. Make overpayments where possible and so long as your mortgage terms allow - most capital repayment mortgages allow you to repay as much as 10% of your mortgage balance per year in overpayments

2. Home improvements may improve the property value, although keep in mind any cost versus how much this will increase the value of your home

3. Let out your home: Rent prices are often higher than mortgage repayments, so it may be possible to let out your home and earn additional income to make overpayments, assuming you have somewhere else to live, such as with a relative. You’ll also need a consent to let from your mortgage lender

Moving home

If you do decide to go ahead and move while still in negative equity, this can be more challenging. There are a couple of potentials for those who cannot wait and need to move immediately, which are:

• Remortgage - There are a few lenders that may allow you to remortgage with a negative equity mortgage. These niche products allow you to transfer your negative equity to a new property. However you’ll likely need a large deposit and pay high interest rates for the privilege

• Port your mortgage to your new home - Some lenders may allow you to port a mortgage, although you will likely have to remain at the same Loan-to-Value (LTV) as when you initially took out the mortgage. This will likely mean providing a deposit that bridges the gap between your current LTV and original LTV

How we can help those in negative equity

If you’re concerned about negative equity in your home, we’re here to help. Whether you’re looking to reduce your negative equity before you move, or need a lender who will consider a negative equity mortgage, at Money Helpdesk we can provide expert advice and guidance to help you achieve your goal.

If you’re a first-time buyer worrying about the potential to fall into negative equity, we can help you reduce that risk by carefully assessing your circumstances so that you don’t overstretch your affordability, and recommending the best type of mortgage for your needs.

Get started here to book a free, no-obligation chat with a whole-of-market mortgage broker about your options.