Negative equity usually happens if there is a big drop in house prices in your area or countrywide. For example, if the amount you owe on your mortgage is £150,000 and your home is now valued at £145,000, you’re now in negative equity by £5,000.
Here, we look at:
What can you do if you’re in negative equity?
Home equity is the difference between the current value of your home and the amount you owe on your mortgage and other loans secured against your home. If you have equity in your home, you may be able to use this to borrow more money for home improvements or other purposes.
If the value of your home goes up, the amount of equity you have will go up. If it goes down, the amount of equity you have will go down.
To get an idea of how much equity you may have, contact your lender to find out how much you owe on your mortgage and get a local estate agent or an online valuation platform to value your home.
To work out how much equity you have, take away the amount you owe from the valuation. For example, if you owe £150,000 and your home is valued at £175,000, your equity is £25,000.
You don’t need to do anything. As long as you keep making your monthly mortgage payments, you may soon be out of negative equity. This will be either because market conditions improve, and the value of your home goes up or because you reduce the amount you owe below the value of your home.
If you’re thinking of making a change, here’s how negative equity might affect your plans:
Some lenders, including HSBC, will let you switch mortgage rates, even if you’re in negative equity.
Explore: How to switch mortgage rates
Making other changes to your mortgage could prove more difficult. For example, remortgaging to a new lender or borrowing more on your mortgage could be difficult, as you already owe more than your home is worth.
Negative equity can be a problem if you plan to move, as the sale price may not cover what you owe. This means you might need to cover the difference from your own money. So, consider if you can afford to do this and what impact it could have on your next purchase.
If you have a capital repayment mortgage, every payment you make will help build up the equity in your home. If you can make overpayments too, this will help build up the equity more quickly.
If you have an interest only mortgage, making your monthly payments alone won’t build up your equity. However, if you can afford to make overpayments, this will chip at your capital and build up the equity in your home. Always check with your lender if you can make overpayments and how that would work under your particular mortgage.
If you’re looking to move or buy your first home, you can help reduce the risk of negative equity by thinking carefully about the property you’re looking to buy and the amount you’re looking to pay for it. You should also think about your deposit. The more money you can put down as a house deposit, the more equity you’ll have to start with to help cushion a fall in house prices later.
Help is available if you find yourself in negative equity, just contact your lender. They will be able to discuss your options with you.
Think carefully before securing other debts against your home.
Your home may be repossessed if you do not keep up repayments on your mortgage.
