Negative equity is a term that can cause some confusion. Here is an explanation of exactly what it means and whether it is something that you need to worry about.
What Is Negative Equity?
Negative equity simply means that your home is currently worth less than the amount you have left to pay on your mortgage.
For example, if you bought your house for £300,000 with a 100 per cent interest-only mortgage and now know that your property is worth £285,000, then you are in negative equity. Your mortgage is still £300,000, so you owe your bank more than you would get if you sold your home.
Who Is Affected by Negative Equity?
If your mortgage is less than your house is worth, you can say that you have built up equity in your property. However, if you bought your home with only a small deposit when house prices were at their peak, then you may find that you have negative equity if house prices fall in your area. House values have certainly soared around Britain in the past few years, but many experts are predicting that this situation will not and cannot continue. In fact, there are indications that values are already starting to fall in London. Estate agents Haart say that prices fell by 3.3 per cent from August to September this year. Analysts at Capital Economics have said that a fall of as much as 30 per cent in house values could happen over the next four years, which would mean that a substantial number of homeowners find themselves in negative equity.
How Can You Find Out If You Are in Negative Equity?
The first thing to do is to look at your most recent mortgage statement or to contact your lender to request a balance update. Next, find out how much your property is worth. You can do this by asking an estate agent for a valuation or using an online valuation tool. Alternatively, you could just see what similar properties to yours are selling for in your area. When you have both these figures, compare them to see if the outstanding balance on your mortgage is more or less than the probable value of your home.
What Should You Do?
If you are in negative equity but can afford your mortgage repayments and have no plans to move, to remortgage or apply for a secured loan, then the problem is not likely to have any serious consequences for you. However, if you wish to remortgage or would like to take out a secured loan, things may be more difficult. Many lenders refuse to offer secured loans or remortgage deals on homes that are in negative equity.
Can You Still Borrow Money for Home Improvements?
This can be problematic. Many homeowners choose not to put their homes on the market while they are in negative equity because of the problems this causes when trying to take out a new mortgage. In fact, many mortgage lenders do not allow their clients to sell their homes if they are unfortunate enough to be in negative equity. Consequently, homeowners often wish to improve their homes instead, perhaps adding a conservatory or an extension to increase the space or refitting their kitchen and bathroom. Such home improvements not only adapt the house to its occupiers’ needs, but also have the additional benefit of increasing the property’s value. However, it can be very difficult to find a lender who will offer a loan secured against a property in negative equity.
Fortunately, home improvement loans can be found if you do your research properly. Some lenders such as Evolution Money are more interested in their clients’ abilities to make the monthly repayments on homeowner loans rather than how much equity they have in their properties.
What Should You Do If You Need to Move and Are in Negative Equity?
If you will be unable to repay your mortgage in full when you sell your home, you will be responsible for the making up the shortfall. You must speak to your lender before you try to sell. Letting out your house while you wait for property values to recover may be a sensible option, but you must discuss this with your lender first.