If you’re a home-owner the prospect of negative equity can cause sleepless nights. What could scare you is that you might be in or very nearly close to negative equity without knowing.
It’s estimated that there are around half a million properties in negative equity in the UK, although some areas are affected far more than others.
It’s a particular problem in Northern Ireland, where up to two out of every five properties bought after 2005 are in negative equity.
Our aim is to help you discover your current equity position. And enable you to make positive choices and build a better financial future.
Home equity explained
It’s quite easy to define what home equity is, however it’s a little tricky to calculate.
Home equity is how much of a property you own and is usually expressed as a percentage.
For example, assuming you sold your property today for £200,000 and you had to pay the bank £150,000 (75%), then you’re equity would be 25% or £50,000.
Another example, say you purchased your property for £150,000 using a 10% deposit (or £15,000) and so you took out a mortgage for £135,000. However, a day later the market falls and the property is now worth £130,000. You would owe the lender £5,000 hence you have negative equity.
Sounds simple, right?!
Not so fast! Here’s where it gets a little tricky. A property is worth what it sells for (and not what you hope for). Plus you might have to pay tax and early repayment mortgage fees, etc.
While it’s fine to ignore these fees and additional costs if you’re working out a rough amount, it’s worth bearing these in mind as they could have a sizable impact.
Your property’s current value
There are a few ways to calculate the current value of your property. You could get 3 estate agents over provide valuations and then use the average.
Another way is to look at properties which have sold within the 2 or 3 years, which are within a mile of your address. You can easily find this data on Zoopla or Land Registry. Remember to look at sold prices and not current the market.
If you’re happy to pay for advice, then you can instruct a local surveyor who will produce a report on your property’s current value.
The easiest way to find out how much you owe is to call your mortgage company. Of course, you might have an up to date statement, which you can use to calculate a figure. Either way, you need a figure of your total debt.
Positive or Negative?
If you end up with a positive figure when you subtract your outstanding mortgage from the property’s current value, then you’re in positive equity. If you have a negative figure then, sadly, you’re in negative equity.
What is negative equity?
When you owe a lender more for your property that it’s worth. It’s that simple.
It is a problem?
It really depends on a few elements. Firstly if you plan to live in that house for a long period then being in negative equity will probably be a temporary problem as the market will rise, and therefore lift your property’s value. And so it shouldn’t concern you too much.
Second, if you’ve borrowed against your current equity for say home improvements, then again, it’s likely to be a temporary problem. Plus if you’re using the cash to add more bedrooms, a bigger kitchen or to upgrade your bathrooms, then you should add double the cost in value.
Thirdly, if you’re looking at changing your mortgage then you might have issues refinancing and probably won’t be able to lower your rate or monthly payments. This could cause problems, especially if you’re remortgaging to make the monthly payments more affordable.
Lastly, if you’re looking to sell in the next year then you might have a ticking time bomb on your hands. Say you’re short by £10,000 then you’ll have to find this amount when you sell. This could be fine if you have savings or other assets but will be a massive issue if your house is your only major asset.
Moving home when you’re in negative equity
It can be tricky to move if you’re in negative equity, even if you have the cash to pay off what you owe. Should you be able to pay the bank in full, you might not have enough to put down a deposit.
Since the crash of 2007 many lenders have had to become more pragmatic. Some even now offer negative equity mortgages. This means if you have to move, you might be able to take your negative equity with you and only have to find a 5% deposit.
Other lenders may not offer a product for your exact situation but may have a way to help you.
It’s also worth considering if you can stick it out for another year and ride your financial woes.
How to reduce negative equity
Thankfully there’s a number of things you can do to reduce negative equity.
Can you rent a room out? While an easy way to bring in money, renting has tax benefits as well, which could enable you to pay off more of your mortgage.
You could, however, downsize to a rented property and rent your home out for a few years as a way to redress the balance. If you do decide to rent your property, you will need permission from your mortgage company.
If that’s not possible then consider drawing up a list of home improvements you could make which will add value. These can be as simple as painting the house or adding an extension. Get inspiration from your local market and try to replicate popular and desirable features in your own home.
If you have savings, it might be worth using them to reduce your mortgage debt. It’s worth talking with your lender and seeing if any fees will apply if you make a one-off lump payment.
Lastly, if you can afford to overpay, even by 10%, then consider doing so. This will guard against future problems and ensure you can quickly get closer to a positive.
What happens if rates rise?
With historically low interest rates, it might seem that you’re doing fine and getting closer to paying off your mortgage. However, even a small rate rise could force you into negative equity and make it hard to keep up with mortgage payments.
Again depending on your long-term plans, a small interest rise will be overcome in time as the market rises and you pay off more of the mortgage.
If you face short-term cash problems due to a rate rise then you might be able to ride the storm by renting a room, starting a small side business or cutting back on luxuries.
Unfortunately, most home improvement takes a few months to complete, which won’t solve any immediate cash problems, but will lead to long-term added value.
- Caluate if you’re in negative equity or not
- Talk with your lender
- See if you can use saving to plug the gap
- Adjust your long-term plans to ride the storm
- Improve your home to add value