How to Manage Negative Equity

The equity in a property is the value of the home that is debt free – this is essentially the difference between the market value and any outstanding liens on the property, such as a mortgage. As payments are made against the outstanding balance of a mortgage, the more the equity increases. However, certain conditions can produce a situation of ‘negative equity,’ where the value of the property is less than the amount that is owed to a lender as a mortgage.

Negative equity is often the result of a drop in house prices – to an amount that is less than that at which a property was valued before a mortgage was taken out – especially where the mortgage is 100%, or close to that amount. It’s difficult to prevent negative equity from arising, as it depends mostly on the housing markets, which is not something that we can control.

Negative equity is a frightening situation to be in but – unless you want to move imminently – it doesn’t have to be an immediate problem. Here are a few tips on how to deal with negative equity if it happens to you:

Don’t move – many property experts will recommend that those who are entering negative equity, or about to enter negative equity, simply stay put. The UK housing market has – generally speaking – continued to rise in recent years and there is a good chance that riding out a drop in prices, whilst paying off the mortgage at the same time, will result in an escape from negative equity, either thanks to the mortgage payments made, a rise in house prices, or both.

Do move – this might sound contradictory, but for some people the idea of sitting tight in negative equity – which could conceivably get worse as the years go by – isn’t tolerable. If you are one of these people then you may be better off selling your house now and paying off the shortfall over a number of years. Remember that you will need the lender’s permission to sell your home and you will need to make sure that you have somewhere else to live, and also that you can manage the repayments of the shortfall.

Reduce your mortgage – whilst you might not have a whole heap of spare money lying around at the moment, anything that you can put towards reducing the amount you owe the lender will help with your negative equity situation. If you have savings then consider using some of these to help reduce the debt – you will always pay more interest on your mortgage than your savings can generate so it makes better financial sense to put the money into clearing the debt.

Try to avoid repossession– whilst no one wants this to become a reality , it is worth making yourself aware of the consequences to provide extra motivation to avoid them. Your credit rating will suffer after an event like this – for at least six years – and you may find that when the mortgage company sells your property they get less for it than you would in a private sale, meaning the outstanding debt is larger than you thought it would be. A mortgage company can pursue you for any outstanding debts for up to six years so repossession is far from being a quick fix solution.

Many thousands of people have suffered the stress of negative equity, but many have turned their situation around – there’s every chance that with the right help you can too.

If you are facing problems, and would like to speak to one of our advisors in confidence, please call Jemima Poppy today on 01908 232879.