If you’re in negative equity you could find it hard to move house or remortgage. Find out what you can do and the help that’s available.
If you have an interest-only mortgage you are more at risk of negative equity than if you have a repayment mortgage. That’s because your monthly payments don’t go towards reducing the value of your debt, only towards the interest.
A property is in negative equity if it’s worth less than the mortgage secured on it, and it’s normally caused by falling property prices.
For example, if you had bought a property for £150,000, with a mortgage for £120,000 and the property is now worth £100,000, you would be in negative equity.
However, if you had bought a property for £150,000 with a mortgage for £120,000 and it’s now worth £130,000, you would not be in negative equity.
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.
You might not know whether or not you’re in negative equity.
First of all, ring your lender to find out how much you owe now.
Next, ask a local estate agent to value your home or instruct a surveyor (who will charge for this).
If the value of the property is below what you owe, then you are in negative equity.
It’s an immediate problem if you want to sell your home.
Unless you have savings that you can use to repay the difference between the value of your home and the mortgage, you might find it difficult to move.
It can also be difficult if you want to remortgage; perhaps to a fixed rate or a cheaper deal.
Most lenders will not let people with negative equity switch to a new mortgage deal when their existing one ends.
Instead, they will normally be moved onto the lender’s standard variable rate.
How easy it is to move will depend on several factors, such as:
Talk to your lender in the first instance and find out what help they can give you.
A very small number of lenders offer a ‘negative equity mortgage’.
This will let you transfer your negative equity to your new property, but you will still be expected to pay a deposit.
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If possible, it’s a good idea to try and reduce your negative equity by overpaying your mortgage.
Firstly, check whether your existing mortgage will let you make overpayments and, if so, how much you can overpay without incurring an early repayment charge.
Next, work out how much extra you can afford to pay every month or as a one-off.
Look online for a mortgage overpayment calculator.
This will tell you how much difference your extra payments could make.
Several mortgage brokers and lenders have these tools.
Another option might be to rent out your home if your lender will agree to this.
This would mean you keep the existing mortgage, although you will probably have to pay a higher interest rate.
You would also have to tell your insurer.
Interest rates have been at the same base rate level of 0.5% since the spring of 2009.
But if interest rates rise, it’s important to make sure you can still afford your mortgage payments.
It’s particularly important if you’re in negative equity as you could be more vulnerable to having your home repossessed.
Find out where to get free help using our Debt advice locator.
If you are already in arrears on your mortgage, talk to your lender and get advice from one of the debt advice charities.
This article is provided by the Money Advice Service.