The meaning of negative equity
Negative equity is simply when you owe more on your property than it is worth.
This can be for a variety of reasons but it’s usually caused by falling property prices.
There are over 500,000 properties in negative equity in the UK, especially in Northern Ireland where 2 out of every 5 bought after 2005 is in negative equity.
What does Negative equity mean for you?
You won’t be able to move houses or buy a new house on a mortgage when your are in negative equity.
The only way you can move houses is if you can generate the shortfall in equity by increasing your sale price or using your savings to cover the shortfall.
A typical Lender will also not offer you a remortgage on the property as at things stand you are already in negative equity and essentially in debt as if you tried to repay your mortgage by selling your property you wouldnt be able to.
However there are some Mortgage lenders who will accept borrowers with negative equity. A few mortgage lenders will accept borrowers with negative equity by lending over 100% loan to value (LTV) against your property.
This will be incredibly costly for you in comparison to a lower loan to value mortgage.
Negative equity and LTV(Loan to Value)?
Firstly Loan to value simply means how much you owe on your property in regards to its value. E.g you owe £500k on a £1m property.
The loan to value is 50%.
In negative equity you owe more than the property is worth so e.g you might owe £600k and the property is worth £500k therefore your loan to value is 110%. LTV is always more than 100% for negative equity.
What causes Negative equity?
Negative equity can be caused by a few things (even when you are paying your monthly mortgage payments every month), they include:
Dipping house prices:
Unfortunately even when you are doing everything right, a dip in house prices could leave you owing more on your mortgage than your property is worth.
This is especially true for borrowers on interest only mortgages as they do not repay the capital but just the interest on the mortgage over the mortgage term.
If property prices dip slightly these borrowers are at more risk due to their huge debt not being repaid as they may find that they owe more than the property is worth and may not want to continue making repayments.
Borrowers who borrow the maximum amount and pay a minimum deposit which in turn leaves them with a high loan to value e.g 95% are of course at a great risk of negative equity if property prices fall.
Missed mortgage repayments:
Missing mortgage repayments can ofcourse put you at risk of negative equity but you will need to have an already high loan to value LTV and be doing either of the above or below for any real risk.
Borrowing on your mortgaged property:
Taking a second charge mortgage or a home improvement loan secured on your home could put you in negative equity by pushing your total loan to value (LTV) up.
In some cases, you may need to get permission from your first charge mortgage lender.
How to get out of negative equity?
Wait it out:
You can simply continue paying your mortgage and wait it out if your negative equity came as a direct result of your property price falling and not you missing mortgage repayments or taking on extra borrowing.
Negative equity will only become a real problem when you want to move homes and sell your current property or remortgage.
Pay it off:
You can simply use your savings (or borrow but do get financial advice before taking on any extra debt commitments) to make overpayments on your mortgage to prevent negative equity.
Check with your mortgage lender to see if you will be allowed to make overpayments on your mortgage.
In any case if you find yourself in a serious debt position you might want to contact the citizens advice bureau. You wont necessarily have to pay it all of in one go, in some cases lenders will allow you to sell your home and make regular payments towards the negative equity still owed on the previous mortgage.
Negotiate your lender:
Some mortgage lenders will agree to extract the negative equity and bundle this in an unsecured loan which you can then payoff without it affecting your property by being secured against it.
The mortgage lender might even write off the debt but be sure to inquire about the consequences of this for you and any future borrowing. Some lender actions such as this will be negatively marked on your credit score.
Rent out your home:
You can rent out part of your home to generate more income to pay off the negative equity. Be sure to advise your lender as this could violate the terms of your mortgage agreement.