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What is Negative Equity and What Can I Do About It?

Guide to negative equity

You may have heard the term ‘negative equity’ quite a lot in recent years. The housing and banking crashes of the late noughties resulted in thousands of UK homeowners succumbing to the property phenomenon.

Negative equity doesn’t just affect property owners at times of financial crisis. It can strike at any time — making life difficult for people who want to move on or cash in on their home.

We’ve put together a short guide to negative equity, so you have an idea of how to react if it affects you.

What is negative equity?

If your home is in negative equity, it means you owe more for your home than it’s worth. If you were to sell your home for its market value, you wouldn’t have enough to pay off your mortgage.

In most cases, this scenario is caused by a sudden fall in house prices. Imagine you bought a home for £200,000 with a mortgage of £180,000. After a sudden drop in prices just a few weeks after the purchase, your home’s value plummets to just £160,000. This means you owe £20,000 more than your home’s new value.

A lot of people fall into negative equity because they remortgage to fund home improvements. And when this happens, selling can become impossible.

Am I in negative equity?

Am I in negative equity?

The truth is negative equity doesn’t affect everyone in the same way. For instance, if you’re planning to live in your current home for the rest of your life, you’re unaffected as long as you keep up with mortgage repayments.

A lot of people don’t realise they have negative equity until they try to sell. It’s not until a home is valued that the problem becomes apparent. Call your mortgage lender and get the exact figure you still owe. Then get your home valued by a local estate agent. If you owe more than the likely sale price your home will fetch, you’re in negative equity.

Can I sell a home that’s in negative equity?

This depends on whether or not you have money in the bank to pay off your mortgage after the sale goes through. Most people don’t have this sort of cash to spare. And as a result, they’re trapped in their mortgage and their home. If you can afford to pay the mortgage lender what you still owe after selling, you can sell. But this doesn’t mean selling is the best option.

A lot of people keep up with their mortgage repayments and wait for things to improve. After all, house prices are volatile in the UK, and they rise as quickly as they fall. And as you pay off your home loan, the negative equity gradually reduces.

Can I get out of negative equity?

Yes, but there’s no quick or cheap fix. You either have to wait it out or stump up the difference. Here are your options:

Can I get out of negative equity?

Dealing with negative equity – make extra mortgage payments

The obvious choice is to repay more of your mortgage to eradicate the negative equity faster. Speak to your lender about making additional payments. However, be aware that there may be financial penalties for making extra payments.

Sell and pay the difference

Sell your home, and the money raised will go towards paying down your mortgage. You’re liable for what’s left, so you’ll need to pay this as well. If you have money in the bank, great. But you might also be able to borrow what you need from a commercial lender, a friend or a relative.

File for bankruptcy

Bankruptcy should always be the nuclear option. It can affect your ability to obtain credit for several years afterward. You should only consider this solution if you’re in serious negative equity and can’t afford monthly repayments. Even then, there are ways out — including selling your house to a specialist home buyer such as Flying Homes.

Choose voluntary repossession

If you’re struggling to keep up with repayments and you’re in serious negative equity, speak to your bank about voluntary repossession. This will affect your credit rating, but it’s not as life-changing as bankruptcy can be.

If your home is in negative equity, don’t panic — but don’t bury your head in the sand. Speak to your lender or a financial advisor about what you can do to tackle the issue.

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