Negative equity can appear scary but with planning and time, you can ensure it is not a major concern. Firstly, it is important to remember negative equity is only a concern when you want to sell your house, so until then there are several options to help you reduce the deficit and get back into the black.
Negative equity is when the total amount of money borrowed for a mortgage is greater than the sale price of the property. As the housing market is variable, there is no guarantee you’ll receive the same price or better for what you paid. To this end, homeowners often get stuck with the fall-out. You may find it difficult to remortgage in the future, sell your house, have a good credit rating, and even go bankrupt, so dealing with negative equity is an absolute must.
To find out if you have negative equity you should get a formal house evaluation to see where you stand. Once you have an idea of your house price you can assess and decide where and what to do to increase the value.
Negative equity can be caused by several factors and by understanding them, you may help yourself in avoiding negative equity in the future. Even with a good mortgage repayment record, you can fall into this pitfall so understanding the causes are important:
House prices are the most common cause of negative equity. Housing crises, bubbles, and credit crises of the past few decades have affected thousands with the plummeting prices leaving large debts in the laps of homeowners.
High loan-to-value (LTV) mortgages- The larger the mortgage, the higher the chance is of falling into negative equity when the house price falls. Homeowners used to be able to buy 100% mortgages but to reduce the risk of negative equity, current homeowners can only get smaller portion mortgages. Lenders often make larger portion mortgages more stringent so access is limited.
The above LTV extends to additional borrowing. A second mortgage obviously adds to the total borrowed so it can also influence negative equity when you look to sell.
Interest-only mortgages have a strong chance of falling into negative equity. As you only pay the interest, the principal value of the loan remains years later. This can have an effect when you look to sell as there is already a large sum of money owed on the property.
Once you’re aware of any negative equity you can consult your lender. Mortgage providers are just as invested as you in seeing their investment work out and can often help you spread the deficit. Flexible lenders have a variety of solutions to help you out. If you have another property, the debt can be split between two properties. Some lenders also offer remortgaging or even specialised mortgages for people with negative equity. Most of these require you to pay more per month so they might not be ideal for tighter budgets.
Making changes to your home may improve its value. Research what changes or additions people may have done in the past and talk to estate agents to find out what can add value to your property. Several smaller projects can be more cost-effective and have a great effect on the total value of your home.
Savings or other liquid assets can be used to pay off the deficit and ease the pressure of negative equity. Be sure to check what your mortgage allows in terms of overpayments. Some lenders might charge fees so make sure to meet with your lenders to discuss options for increasing payments.
Property values fluctuate so time can be your best friend. If you’re not worried about selling right away, pay your mortgage as normal and wait for the economy to improve. You may find that with a few more years of repayments and recovering house prices you’ll be back in the black. It’s important to remember negative equity only affects you when you want to sell.
If you do need to move but can’t afford to lose out on the mortgage, you can try renting out your property while renting another place too. This solution helps you maintain payments on the mortgage while still allowing you the mobility to move as needed.
All these techniques are viable options and preferable to bankruptcy, selling out, or losing out on a huge investment. With time on your side and legal support; negative equity doesn’t have to be a massive detriment. If you need any legal support Smith Partnership Move are on hand to guide you through this process and ensure you stay informed and empowered.