Negative Equity: What It Is And How To Get Out Of It

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Equity in a property is what makes your investment worth it. Some, however, find equity in a house can be a bit complex. What is negative equity on a house? What happens with negative equity?

What Is Negative Equity?

Understanding the answer to this question starts with understanding the answer to “What is equity on a house?” Equity in a house is the difference between the value of the property and the outstanding balance on a mortgage. Negative equity, also known as being in an underwater or upside-down mortgage, is a situation where what you owe on the mortgage is more than the current market value of the property. Negative equity in a house can occur due to factors such as a decline in property values or taking on a high-interest loan. Being in a negative equity mortgage can be financially challenging and limit options for selling or refinancing the property. However, there are ways to get out of this situation. One option when you’re facing negative equity in the UK is to continue making mortgage payments and hope the market improves, gradually increasing your home equity. Alternatively, when you’re facing a mortgage with negative equity, you can consider negotiating with your lender for a loan modification or a short sale, where the lender agrees to accept and allow you to sell it for less than you owe. Selling a house in negative equity isn’t always an option, though. Another option when you have negative equity on a house is to make extra payments towards your mortgage to reduce the principal balance faster and build equity over time. Seeking guidance from professionals, such as those who specialise in dealing with those who have a mortgage with negative equity, can also provide valuable advice tailored to your specific circumstances. They may be able to help you understand what happens with negative equity or help you remortgage negative equity in your home.

How Do I Know If I’m In Negative Equity?

“Negative equity” describes the situation in which the value of an asset (in this case, a property) is less than the outstanding balance on the loan used to purchase the asset. Typically, this applies to homeowners in the UK who owe more on their mortgage than their home is currently worth.

Using the UK’s property market as an example, you can determine whether you are in negative equity:

Check your mortgage statement or contact your lender to determine how much you owe on your mortgage. To determine the value of your home, you should first calculate its value. You may obtain an instant home valuation by contacting your local estate agent, by getting a valuation survey, or by using our free online tool. When the value of your property is less than the amount owed on your mortgage, you are considered to be in negative equity.

  1. Analyse the current value of your property:

The most common way to value a property is through an estate agent. Obtain a valuation for your property from a few local estate agents. They usually offer this service for free in order to gain your business for either selling or renting your property.

An expert valuation: An expert valuation may be provided by a chartered surveyor. There is a greater chance of error if you choose this method, and it might cost you more money, however, it is more accurate.

The use of online property valuation tools and websites: Numerous online tools and websites are available for estimating a property’s value based on recent sales in the neighbourhood. It should be noted that these are generally less accurate than a personal valuation; however, they may provide a ballpark figure.

  1. Determine the outstanding balance of the mortgage:

You can find out your current outstanding mortgage balance by reviewing your most recent mortgage statement or by contacting your lender.

  1. Identify the differences between the two figures:

You are in negative equity if your mortgage balance exceeds the value of your property.

What Are The Causes Of Negative Equity?

The Fall in Property Prices: The fall in property values after you have purchased your home might cause you to fall into negative equity, especially if you purchased the property with a high Loan-To-Value (LTV).

Low Down Payment Mortgages: Even a small decrease in property prices could result in negative equity if you take out a mortgage with a small down payment (e.g., 5% down).

Negative Equity Has The Following Impacts:

A Remortgage Can Be Difficult: Remortgaging with negative equity can be challenging since lenders may view you as a high-risk borrower.

The sale of a property: In the event that you sell your home when you are in negative equity, you will still be responsible for the remaining balance. It may be difficult to cover the difference if you do not have adequate savings.

A source of stress and financial strain: Being unable to repay your mortgage can lead to stress and financial strain.

In The Event That You Are In Negative Equity, You Should:

Consider Overpaying Your Mortgage: If you are able to do so, consider overpaying your mortgage in order to reduce your mortgage balance as quickly as possible.

Consider Staying Put and Waiting: If you don’t need to move, consider staying put. Your negative equity might be reversed over time if property prices rise.

Discuss Your Options With Your Lender: Talk to your lender if you are having difficulty making payments. You may be able to find solutions or receive advice from them.

Consider Speaking to a Financial Advisor or Housing Counselor: You may find it helpful to speak with a financial advisor or housing counsellor who can provide tailored advice.

Negative Equity And How To Overcome It

A negative equity position can be a source of concern for homeowners, but there are strategies they can use to deal with, and ultimately get out of, the situation. You can take the following steps if you have negative equity on your home in the UK property market:

  1. Do not overpay your mortgage:

You may be able to reduce your mortgage balance more quickly by making overpayments. Adding just a few dollars to your monthly budget can have a significant impact over time. Please ensure that your lender accepts overpayments without incurring penalties before proceeding.

  1. Do not move:

Negative equity can often be resolved by waiting. Your home’s value may increase again given enough time if property prices fluctuate. Waiting may be beneficial if you do not need to sell immediately.

  1. Savings-based repayment:

If you have substantial savings, consider paying off some of your mortgages with them. You should speak with a financial advisor before taking this step, as this may not be the best solution for everyone.

  1. Negotiate a new loan agreement with your lender:

Especially if you are experiencing difficulty making payments, you may want to speak with your lender about the situation. You may be able to negotiate a different repayment plan or even a mortgage holiday with them.

  1. The property may be rented out as follows:

It may be advisable for you to rent out your home and move into a more affordable rental property if your circumstances allow it. You could collect enough rent to cover your mortgage payments, or even exceed them, allowing you to overpay the mortgage and reduce the outstanding balance more quickly.

  1. Complete the sale and pay the shortfall:

If necessary, you can sell your property and then negotiate with your lender about reimbursing the shortfall. This is a last resort option, but if you must sell, you can do so. An example of this would be to take out a personal loan or establish a repayment schedule.

  1. Take into account a voluntary repossession:

The voluntary repossession of your property may be your only option if you cannot see a way out and are unable to make your repayments. As a result, the lender will receive the keys back. If you are considering taking this step, seek professional advice before making any decisions that will affect your credit rating and future borrowing.

  1. Consult with a professional:

The best course of action when dealing with negative equity is to consult with a professional, such as a financial advisor or mortgage specialist. Depending on your particular situation, they may be able to provide you with guidance.

  1. Refinancing schemes for mortgages:

Previously, the United Kingdom had mortgage rescue schemes in which housing associations would purchase part or all of your home, allowing you to rent it back. However, local schemes and support may still be available, even though they are not as prevalent as they once were.

  1. Improving your home:

It is possible to increase the value of your home by making value-added improvements, depending on the nature of the market and the condition of your property. Be cautious, however, since you cannot guarantee that the entire cost of the improvements will be recovered upon sale.

Regardless of the situation, the most important thing is to avoid burying your head in the sand. To navigate a negative equity situation, you should address it proactively, communicate with your lender, and seek professional advice.

For homeowners, it is crucial to avoid negative equity in the UK property market (or any other property market). If the value of an asset falls below the outstanding balance on the loan used to purchase it, the asset is deemed to have negative equity. When it comes to housing, it refers to a situation in which the current value of the home is less than its outstanding mortgage.

Here are some strategies for avoiding negative equity on a home:

  1. Invest in a large down payment: If property prices decline, a larger down payment will enable you to protect your investment. There is a correlation between the difference between what you owe on your mortgage and the value of your property and the likelihood of you falling into negative equity.
  2. Mortgages with fixed interest rates: In an environment where interest rates are rising, a fixed-rate mortgage can provide you with more stability as far as your monthly payments are concerned. As a result, your debt will not grow unpredictably.
  3. Make sure you’re not overpaying: Research thoroughly prior to purchasing to ensure you are not overpaying. Obtain the services of a reputable estate agent, and consider having a property survey performed to detect any potential issues that may affect the property’s value.
  4. Take Care When Taking Out Long-Term Mortgages: Mortgages with longer terms (such as 35 years) may require you to pay off your mortgage more slowly. Despite offering smaller monthly repayments, the outstanding loan amount decreases at a slower rate, increasing the risk of negative equity in the event of a decrease in house prices.
  5. Regularly Overpay: Make an effort to overpay your mortgage on a regular basis. Your equity in the property will increase as the outstanding balance is reduced more rapidly.
  6. Improvements to the home: Maintaining and improving your home can increase its value or prevent it from depreciating faster than the market as a whole. In any case, it is important not to exceed the market’s capacity for improvement in your area.
  7. Keeping Informed: Stay abreast of broader economic and property market developments. During a downturn in the market, it may be prudent to be more cautious when making real estate decisions.
  8. You may want to consider insurance: The purchase of some insurance products can protect you from falling into negative equity, although they can be costly. It is important to read the terms and conditions in order to understand what is covered.
  9. Make a long-term investment: There are cycles in the property market. A short-term market downturn may not affect you as much if you intend to stay in the house for a long period of time, as markets often recover and grow over a longer period of time.
  10. Don’t Borrow Against Your Home: When you have accumulated some equity in your home, it may be tempting to borrow against this equity to finance home improvements or other expenses. Despite this, if the value of your home declines, you may find yourself in negative equity.
  11. Beware of high Loan-to-Value (LTV) mortgages: Having a high Loan-to-Value (LTV) mortgage, such as 95% LTV, leaves you more vulnerable to negative equity since you have a small amount of equity in your property at the time of purchase. In the event that house prices decrease even slightly, you can quickly find yourself owing more than the property is worth.
  12. Consult a professional: Talk to a financial advisor or professional with expertise in real estate if you have questions about negative equity or the value of your property.

Lastly, remember that while these steps can reduce the risk of negative equity, no strategy can eliminate that risk entirely. Property values can be influenced by a wide range of unpredictable factors, from economic downturns to local amenities changes.

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