The concept of negative equity is not encountered often; however, it can have a considerable impact on your financial life and how you interact with banks.
Having negative equity can prevent you from selling your home, from mortgaging it, and may even make it difficult to rent out your property if you find it difficult to pay the mortgage. The worst part about negative equity is that nobody will let you know that you’ve got an issue, which means that you may wake up one morning and discover that you’ve been blocked from many financial services.
This having been said, negative equity is not a bottomless pit of despair. Although it may seem scary, there are ways to solve this financial issue. Here is what you need to know:
What is negative equity and when can it appear?
Negative equity essentially appears when a property is worth less than the mortgage secured on it. It commonly occurs during periods when real estate prices are in a freefall; however, there are other factors that could decrease the price of a property.
Looking at an example, if you have purchased a house that costs £200,000 with a mortgage of £150,000, and the property is now worth £130,000, it is now in negative equity. In other words, a property is in negative equity if its current worth is lower than the value of the mortgage secured on it. Although this may not seem like anything bad, it can limit your house-related financial options.
Rough estimates show that there are around 1,000,000 properties that are in negative equity throughout the UK. Generally speaking, each financial crisis that hits the UK will put many properties in negative equity; however, solving this issue is not difficult, provided that you know what your options are.
First of all, you need to know if your property is in negative equity. Nobody will notify you so it will be up to you to find out. Ask your lender how much you currently owe. The next step is to determine the current value of your home. You can do this by either paying for the services of a surveyor or ask a local estate agent for information.
Once you have all of this information, you will be able to determine if the current value of the property is lower than what you owe. If it is, your property is in negative equity.
Issues created by negative equity and how you can get out of this situation
If your property is in negative equity, you may find that you will not be able to sell it unless you have savings that you can use to repay the difference between its current value and the mortgage.
Remortgaging may also be problematic, mainly due to the fact that most lenders will not agree to give you a new deal when the current one ends. Instead, you may be transferred to the lender’s standard variable rate.
Other issues may arise if you want to move house. This is because most lenders do not offer a negative equity mortgage. However, if you do manage to secure one of these deals, you will be able to transfer the negative equity onto a new mortgage (you will still have to pay a deposit).
Reducing your negative equity can be done by overpaying your mortgage. Ideally, you should be able to make overpayments without having to pay early repayment charges. If possible, use an online overpayment calculator to find out how much you can safely pay.
Overall, you should only worry about the possibility of going into negative equity during or after an economic crisis. If nothing changes on a financial level, then you’re probably safe and have nothing to worry about.