Negative equity is when a property’s value is less than the mortgage the homeowner took out on it. Being in negative equity can make it difficult to move homes or remortgage. Find out more below about what negative equity is, how it works and how to find out whether you are in negative equity or not.
What Is Negative Equity?
Negative equity refers to when a property’s value is less than the outstanding balance on the mortgage which was used to purchase the property. In other terms, negative equity is a deficit of an owner’s equity (the value of shares in the house) in their property which was bought through a mortgage.
In order to calculate negative equity, you need to take the property’s current market value and subtract how much is remaining to be repaid on the mortgage. Home equity UK calculators are widely available online, and can be found at the touch of a click!
How Does Negative Equity Work?
Home equity, also known as positive equity, is how much interest a homeowner has in their home i.e. how much of their home they own outright. This is the amount of their mortgage that they have already paid back. Another way of thinking about equity is as the property’s current market value after subtracting any liens that are attached to the property. This value will fluctuate with time as more mortgage payments are repaid. The state of the market and economy will also impact the current value of the property.
If a homeowner has used a mortgage to purchase a home, the lender will have interest in the home until the mortgage has been fully repaid. Home equity refers to the portion of the home’s current value that is owned outright by the owner. When purchasing a home with a mortgage, borrowers will need to have put down a downpayment at the initial point of purchase – this is a part of the home that is already owned by the homeowner.
Properties can appreciate or depreciate in value and this will also affect the equity value a homeowner has. If the property value appreciates, a homeowner’s equity value will increase; however, if the market value of the home depreciates, they risk being in negative equity. This happens if the current market value of the property falls below the amount that the property owner owes on their mortgage.
Home equity can be accumulated by either a down payment made during the initial purchase of the property or with mortgage payments, as a contracted portion of that payment will be assigned to bring down the outstanding principal still owed. Owners can benefit from property value appreciation as it will cause their equity value to increase.
How Do You Know If You Are in Negative Equity?
You may not know if you are in negative equity or not. In order to find out, first check your mortgage statement. You can also contact your mortgage lender to see how much you still owe on your mortgage payments and this will give you a better idea about your current home equity.
Before knowing whether or not you have paid off enough of your mortgage to be out of negative equity, you need to know the current market value of your property. You can get a valuation from a surveyor or local estate agent or get an instant online valuation. If the value of the property is less than what you still owe, then you are in negative equity.
Why Is It a Problem If You Are in Negative Equity?
One of the major problems with negative equity is that it limits homeowners from selling their properties. For instance, if you are in negative equity and want to sell your home, you will have difficulty doing so. This is because you will need to have sufficient savings to be able to repay the difference between the value of your home and the mortgage.
It can also be problematic if you want to remortgage your home as most lenders will be unlikely to let you switch to a new mortgage deal. In this case, it is likely that those in negative equity will be automatically moved onto their lender’s standard variable rate (SVR) at the end of their existing mortgage deal.
How Can You Protect Yourself From Negative Equity?
The main way to avoid negative equity is by putting down the largest possible deposit when you purchase a home. This way, you set yourself up to have the most equity possible when you can initially afford to do so. As an outcome, the larger the deposit the less mortgage you will need to pay back.
Can You Sell a Home With Negative Equity?
It is still possible to sell your home, even if it is in negative equity. While it might be a daunting decision, selling your home while in negative equity is becoming more commonplace today as people struggle with mortgage repayments, finances and everyday living costs.
On the other hand, you could consider remortgaging your home to a company that specialises in negative equity mortgages. While this might be lengthy and possibly expensive, it might help you financially in the long-run in terms of your own money and debt.
Likewise, you can even talk to your own mortgage lender who may be able to set up a customised repayment plan if you are currently struggling to pay off the mortgage. There’s always a solution.
What Can I Do About Negative Equity?
There are some steps you can take to get yourself out of negative equity, and therefore be in a better financial situation. Below, we’ve compiled a short list of things you can do to avoid and get out of negative equity in your home.
- Stay Put: Sometimes, it might be best to stay put in your home and continue paying off the mortgage slowly. You may find that in a few years your property price rises, and will mean you can sell it for a higher value.
- Manage Debts: Managing all of your outgoing expenses and debts can help you free up some cash and enable you to repay the mortgage better. Debt is one of the main reasons why people fail to repay mortgages and fall into negative equity.
While negative equity can be stressful, it is still possible to manage it and better your equity over time. Alternatively, you can seek professional advice if you are struggling to repay or sell your home.
