Ask Our Expert

Negative equity- Ask our expert

On the subject of negative equity, our expert says...

Hi Robert,

Thanks for getting in touch. I’m not surprised you are worried about negative equity – it has featured frequently in recent news.

Just last week the Council of Mortgage Lenders (CML) (www.cml.org.uk) suggested that as many as 900,000 homeowners currently have some kind of negative equity. It did point out however that the majority of these – around two thirds – are facing modest shortfalls of less than 10%.

Hopefully, I can help you work out whether or not you are in negative equity and whether you really need to worry about it…

How to work out whether you are in negative equity

Negative equity means that the value of your outstanding mortgage is greater than the value of your house. To work out whether you are in negative equity, you should look at the following three things:

1. When did you get a mortgage? – The more recently you got your mortgage, the more likely you are to be in negative equity. If you have been on a repayment mortgage for many years then you are likely to have built-up substantial equity in your property, which will not easily be cancelled out by house price falls so far. If, however, you bought your house in the last couple of years, you are likely to have felt the full force of falling house prices and the equity you put into your house may since have been wiped out. If you took out an interest-only mortgage you are even more likely to find yourself in negative equity as you will not have been paying off any of the borrowing against your house’s capital.
2. How big a deposit did you put down? – The smaller deposit you put down when you took out your mortgage, the more likely you are to find yourself in negative equity because your deposit is more likely to have been wiped out by house price falls. If you recently took out a mortgage at 100%, or worse 125%, loan-to-value then there is a high chance that you are already in negative equity.
3. How far have house prices fallen in your area? – The further house prices have fallen in your area, the more likely you are to be in negative equity. Looking at the movement of house prices in your area can give you a good indication of how the value of your house may have changed. The BBC has a fantastic house prices tool here which allows you to search by region, county and postcode to discover quarterly and annual house price changes in your area. If the price of your house has fallen below the outstanding amount left to repay on your mortgage, then you are in negative equity.

These three factors can be tricky to weigh up, and if you think being in negative equity may cause you difficulties, then it may be best to contact an independent financial adviser (IFA) to help you assess your situation.

The effects of negative equity

While it’s not great to be in negative equity whatever your situation, the only time it will have significant effects is if you are planning to sell your property or if you want to remortgage.

Negative equity will not necessarily stop you doing either of these things. Indeed, Bob Pannell, head of research at the CML says that when people need to move house for a good reason, “lenders can often be flexible to existing borrowers with low or negative equity, as long as their financial position is sound and they have a good payment track record.”

However, negative equity could make negotiating a decent mortgage deal more complicated. If you need to move house or remortgage then the best thing you can do is talk to your current lender, other prospective lenders and if necessary a mortgage broker to find out what your options might be.

How to avoid negative equity

One of the best ways to guard against negative equity, now and in the future, is to try to make overpayments on your mortgage.

By making additional payments, no matter how small, you will increase the amount of equity you have in your house. Not only will this mean you are less likely to fall into negative equity, it will reduce the amount of interest you will pay overall, and could shave years off your mortgage term!

Ask us a question

If you have an money query please email OurExpert@CreditChoices.co.uk

Comments