The housing market can be a tricky place, and there are hundreds of stories of negative equity.
This particular issue can be very distressing to deal with. And if you don't deal with it, it can present as a problem for a very long time.
What makes this problem even more stressful is that, if left unchecked, you could find it difficult to move house or even gain a remortgage agreement. There is a lot to think about here, and plenty of key points that are essential for you to understand if you are in this situation.
So, what is negative equity?
Perhaps one of the most distressing moments in UK property history happened back in 2008, when house prices fell sharply. What happened next was a perfect example of what negative equity is.
The house price plummet was caused by a recession, and it meant that people owned houses that were worth less than the loans they took out to buy them. So even if they sold the houses, it wouldn’t make the situation better. And selling the house was in itself a challenge, due to the climate.
Many people suffered because of negative equity.
It affected other areas of their life, including other borrowing that they were responsible for.
This is what happened:
If you bought a £200,000 property and had a mortgage of £180,000, and then the property falls in value to £160,000 you’re in negative equity.
Fact: In Northern Ireland, the negative equity problem is a major issue. Around two in every five properties purchased after 2005 are in negative equity.
Perhaps you won’t be surprised to hear that negative equity has a direct impact on you being able to sell your home. Basically it will make it very difficult.
How it could affect you:
- Unless you can repay the difference between the mortgage and the value of the home, you will find it very difficult to move
- Banks and other lenders will find it impossible to allow you to switch to a new mortgage when your current one ends
- Any remortgaging simply won't happen
Unless you have savings or other sources of money that will help you make the payments, the house is in a lot of trouble. This is why so many homeowners who are experiencing negative equity describe themselves as feeling ‘trapped’. As long as that amount of money is still sitting there, and you don't have the means to pay it, negative equity will linger.
Is it all bad news?
In fact, it’s arguable that every person who is in negative equity has different circumstances. Knowing what your circumstances are and what this means for you is the first real step towards addressing the problem.
At the same time, and in practical terms, not every person or family in negative equity is working with the same amounts of money. So naturally, there are different circumstances regarding debt and financial implications for everyone. So it won’t always be bad and there are different things to consider for everyone.
If you're in negative equity and want to move house
This is the main issue that faces someone in negative equity. If moving home wasn’t an issue, then it’s always possible to stay put until things change. As long as you make your mortgage payments you're fine.
But if you want to move home it’s time to face up to some facts. The following steps need to be approached honestly.
If you want to move house:
- You need to understand how bad it is. This is one of the key aspects of dealing with the problem. You need to work out how much negative equity you're in. This may require a frank conversation with the bank, but it is really important that you know the exact figure you are up against
- You need to be clear of the value of the property you want to move to. This knowledge allows you to see an accurate picture of exactly where you are
- You have to face facts about your existing mortgage. A big part of moving forward is based upon where you are with your mortgage. If you are up to date with payments and have had no arrears at all you're in a better position than you think
- You really need to have a deposit against a new purchase. Obviously, the more you have the better. And it’s understandable that negative equity has a ‘knock-on’ effect on your savings and your current levels of income. Getting a deposit might seem impossible but doing so can make a huge difference
One clear option, your savings
Some people are able to save, and save significant amounts. Using your savings to reduce your mortgage and therefore bring the equity and the mortgage closer to ‘sensible levels’ is a definite option, and many people choose to attack the problem in this way. But this doesn't mean that it is a simple problem.
The cold reality
It’s important to be aware of what you can and can't do with your savings. And it’s also important to know what banks and other bodies would prefer you did or didn't do. Using your savings to reduce your mortgage is fine as long as:
- Your bank doesn’t charge you a huge sum to do so. We’re assuming you arranged your mortgage through your bank. Whichever lender you used, you need to know if they’ll charge you a fee for paying off a lump sum. Many of them do. And it could be a significant amount
- Don't forget interest. Your savings accrue interest as long as they are kept in a savings account or other financial instrument. Is the payoff you receive when pouring them into a mortgage worth it? Or would you make more money in the long run with leaving the savings where they are?
- There may be an interest penalty. This could turn into a bit of a horror story. If you withdrew, say, £5,000 with ten day’s notice, the lender may charge you the interest you would have earned on the full notice period. For example, on a 60 day notice account, you would owe the interest on the remaining 50 days
- And don’t forget that once you’ve spent your savings, they’re gone. Not to sound patronising, but your savings are there for a reason. That ‘reason’ vanishes once you’ve spent it, and you may need access to your savings later on in life
The waiting game
You can of course wait and see what happens. Sitting on a house that is in negative equity is not a problem if you’re not in a hurry to move. And the way the industry is going, it could be a situation where you don’t have to wait forever. The housing market has its peaks and troughs, and if you’re going to wait it may not be such a bad thing.
The main issue here is the mortgage. This is the area that you've got to be extra careful about. As long as you can pay off your mortgage you’re in the clear. And if this is the case then it’s just one thing to focus on while you wait for the value of the house to rise again.
In general, if you are able to make those payments, the problem will go away.
Taking a look at the graph above, it’s easy to spot the dips and the rises in the price of houses. Since 2013, the price of property has risen steadily across the UK.
And if you look at the period of time here between 2005 and 2017, it is easy to see that the average house price in England took about 7 years to recover to it's pre-recession prices of £200,000.
This should give you some idea of how viable the waiting game is.
So hanging on for a few years is a definite possibility.
In the meantime you can make overpayments on your mortgage. Most lenders allow this but will charge penalties if you go over the stated overpayment amount.
Renting the house out
This is an option that many people have pursued. It's certainly something that makes sense, as long as you don't end up in a situation where the process ends up costing you more money.
- A home that people want to rent. There's no point putting the property up for rent if it is not attractive. You’ll end up with an expensive problem, especially if repairs are required.
- Somewhere to live. You can’t rent out your property if there is nowhere for you to go. Whether this is a friends and family situation, or you have found a home with suitable rent costs, remember that you are trying to make money here.
- A rental income that pays the mortgage. This is the biggest stumbling block for everyone. Rent has to cover the mortgage, especially if you yourself are renting elsewhere.
- A clear decision on how the property is to be managed. You can do it all yourself, but it is a lot of hard work and stress (even with good tenants). At the same time, using an agency to rent your property costs money, and in some cases that’s a lot of money
Discussing things with your lender
There are a couple of other options you can pursue to try and make sure that you can sell up and leave the home. One of these involves speaking to the people who've provided you with the mortgage loan.
Your lender will usually be sympathetic to the problems of negative equity. And if you see them as soon as is possible, they will respect this.
This does mean that you'll need to have a lender who is willing to think about all the options available.
This means flexibility.
What they may be able to do:
- Allow you to transfer your mortgage to another property
- Give you some alternative finance options
- Let you remortgage
They may not be able to offer anything at all. Each lender is different. One thing that will go in your favour (as mentioned earlier) is a history of paying your mortgage.
The problem here is all about the difference in value between the mortgage and the property. So if you're able to take out a loan (on as short a term as possible), there could be a positive outcome in that you ‘buy out’ on the mortgage.
As the market changes, so do the options.
In recent times, companies have been started that have the express purpose of buying homes for cash, and then selling them on. This new culture has meant that people who want to be rid of a property (and are willing to accept a lower offer) can obtain a speedy solution.
If you're looking at negative equity and need money to pay off the difference and maintain a mortgage, this is of course an option. There are some conditions that will dictate the success of such a move though.
Remember, it’s all about the lender:
Selling your home whilst knowing you'll not make enough to pay your mortgage means you are breaking the contract between you and your lender