Mortgage Guides

Do I need to worry about negative equity?

Updated: Wednesday 11 May, 2011

By Hazel Cottral - hazel@consumerchoices.co.uk

We explain what negative equity is, how to work out whether you are in negative equity and how to avoid it.

The dreaded phrase “negative equity” seems to strike fear into any homeowner’s heart, but what does being in negative equity actually mean and do you really need to worry about it?

In this guide we show you how to work out if you are in negative equity, what to do if you are and how to avoid it if you’re not.

• What is negative equity?
• Do I need to worry about negative equity?
• How do I work out if I’m in negative equity?
• How do I escape or avoid negative equity?

What is negative equity?

Put simply, negative equity means that your house is worth less than the value of your outstanding mortgage.

According to figures from the Land Registry (www.landregistry.gov.uk),whose figures cover all completed house sales in England and Wales, house prices fell 12% from their peak in January 2008 to March 2011. This has knocked around £22,000 off the average house price, taking it down to £160,996 from £182,907.

As a result, an increasing number of people are finding themselves in negative equity.

For example, if you bought your house for £100,000 in January 2008 and took out a 100% mortgage or even had a 5% deposit then, according to the Nationwide Building Society, the value of your house will now be £90,513 - a fall of 9.47%. If that’s the case, your mortgage will be greater than the value of the property secured on it and you are in negative equity.

In April 2009, the Council of Mortgage Lenders (CML) (www.cml.org.uk) estimated that 900,000 households were already experiencing some degree of negative equity, although the majority of these - around two thirds - faced only modest shortfalls of less than 10%.

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Do I need to worry about negative equity?

While it’s always good to know where you stand financially, negative equity shouldn’t really be a big problem if you plan to stay in your home for a long time, as house prices should recover in the long-term.

According to Nationwide’s House Price index, had you bought a property for £100,000 in January 1995, it would now be worth £317,866, an increase of 218%. So if you’re buying property for the long haul, history is on your side.

One myth that tends to persist is there is a strong causal link between negative equity and mortgage repayment problems. According to the Council of Mortgage Lenders, such a link does not exist.

According to the CML, payment problems are typically associated with unexpected spending commitments, reduced income and changes in household circumstances. Negative equity, on the other hand, only surfaces if households need to move. So if you want to move house, you may find that negative equity puts you in a difficult situation. You will need to negotiate a new mortgage deal with your lender to allow you to move.

Being in negative equity and also moving house may make it trickier to negotiate a competitive remortgage deal, as lenders are likely to be reluctant to lend you more than your house is actually worth. It is important that you get the correct valuation for your property, simply because the amount of equity you are judged to have in your home will dictate how good a remortgage deal you can get.

If you are in either of these situations, see our tips below on how to build up equity in your home.

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How do I work out if I’m in negative equity?

There are three key factors to take into account when working out whether you are in negative equity:

1. When you took out your mortgage – If you took out your mortgage within the last four years, you are more likely you are to be in negative equity as you will not have had a chance to build up substantial equity in your home, meaning you're more likely to have felt the full force of tumbling house prices.
2. The size of your deposit - 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 equity is more likely to have been wiped out by house price falls.
3. How far house prices have fallen in your area - The further house prices have fallen in your area, the more likely you are to be in negative equity. You can find out average price falls in your area using the BBC’s online house price tool. If the price of your house has fallen below the outstanding amount left to repay on your mortgage, then you are in negative equity.

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How do I escape or avoid negative equity?

If you want to avoid negative equity, or are already in it and want to escape it, follow these tips:

A loss is only a loss if you sell at the wrong time – If you’re in negative equity, as daunting as it may seem, your loss is only a loss on paper and will only be realised into an actual financial loss if you sell. If you can afford your mortgage and don’t need to move, stay put and ride out the negative equity until the property market rises again.

Make overpayments on your mortgage – Making mortgage overpayments, no matter how small, will pay down your mortgage debt and build up the amount of equity you have in your home.

Compare mortgage deals – If you’re coming to the end of a mortgage deal, be sure to shop around and compare mortgages to ensure you get the best rate. Switching to a better deal could save you hundreds of pounds, which you could use to overpay on your mortgage.

Start saving – If your mortgage lender doesn’t allow overpayments and you have disposable income, you can start building up a lump sum in a savings account to make up any shortfall when you sell your house or remortgage to a better deal.

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THINK CAREFULLY BEFORE SECURING ANY DEBTS AGAINST YOUR HOME.
YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON A MORTGAGE OR ANY OTHER DEBT SECURED ON IT.