Negative Equity

What Is Negative Equity?

Simply put, negative equity is the term used to describe the unfortunate situation of owing more on your mortgage than the property is worth on current market values. This means that if you sell the property, you can’t afford to clear your outstanding mortgage, and this naturally makes it very difficult to move home – not only will you face a shortfall in your mortgage that needs to be paid, but your mortgage company must also give you permission to sell if the price you get for the property is less than the amount owed on it.

Causes of Negative Equity

Negative equity typically arises when a home is bought at the height of a property boom, and when house prices start to fall because of economic downturn or recession, there comes a point where the value falls below the mortgage balance. This is especially likely to happen when little or no deposit was paid when buying your home, as with a 100% mortgage for example.

Other causes of negative equity include loans secured on the property taken out before prices started to fall, or even the use of loans of up to 125% of the property’s value at the time of borrowing.

Your Options

If you have negative equity, your best bet is to stay in your current home until the property market recovers and prices rise sufficiently to solve the problem. Unfortunately, this isn’t always an option – you may have to move to another part of the country because of work, or you simply might not be able to afford your current mortgage and need to find somewhere cheaper.

If you have no option but to move, then speak to your lender, as they may be able to bundle up the mortgage shortfall into a new mortgage on your next property. In the current climate though, this may be problematic, as mortgage lenders are wary of granting loans where there is little or no equity, never mind negative.

You may also be able to arrange unsecured finance to cover the shortfall, although this is likely to be expensive and might not be possible at all if the shortfall is large.

If you have an endowment mortgage, you may be able to offset the value of your investment against the shortfall – to see whether this is feasible, speak to an independent financial advisor.

If none of these options apply to you, then your lender may agree to secure the shortfall amount against a guarantor’s property, for example a parent or another family member. Take care though, as that home would be at risk as well as yours if you didn’t keep up your repayments.

One final option is too drastic for most people, but is at least worth considering if there really is no alternative: handing in your keys and walking away. This will obviously be a default on your mortgage, and will lead to repossession proceedings and the probable sale of your home at auction, where it’s unlikely to fetch the full market price.

You will then have to come to an agreement with the mortgage lender to repay the shortfall in some way. Be aware though that once your home has been repossessed, this fact will be on your records for 6 years and you will find it more or less impossible to be approved for a new mortgage in that time.