What is a negative equity mortgage and how can it impact you?

What is a negative equity mortgage and how can it impact you?
Homeowners may have heard the term 'negative equity' being bounded around recently as the UK's house price explosion has started to show signs of slowing up.

Certainly, those looking to buy a home will be aware of the potential for negative equity in market where growth has slowed.

If you do find yourself in negative equity as a homeowner, it can at best limit your options and at worst cause you significant financial turmoil.

CJ Hole's guide to negative equity can help you understand what it is and how it could affect you...

What is negative equity?

Negative equity is when a property is worth less than the mortgage used to purchase it.

It's estimated that a drop in UK house prices due to the UK's Brexit situation at a level not seen since 2008 would place almost 500,000 homes in negative equity.

As an example, if you purchased your home for £300,000 with a 90% mortgage of £270,000 and a price crash saw your home's value drop to £260,000, you would be in negative equity.

What is a negative equity mortgage?

A small number of lenders will consider offering a negative equity mortgage for those in negative equity but who need to move home.

A lender's decision on a negative equity mortgage will very much come down to individual circumstances, but homeowners consider one should factor in:

  *  Potential increase in fees or charges
  *  Higher mortgage interest rate
  *  Possible early repayment charges

Selling a shared ownership property in negative equity

As with anything in the property market, there are pros and cons when it comes to shared ownership properties.

Shared ownership, in simple terms, sees buyers purchase a percentage of a property with a mortgage and pay rent on the remaining share.

The pitfalls of this scheme when it comes to negative equity are the same as falling into negative equity on a property you own 100% of.

However, the added complexities of shared ownership and the role of the housing association that owns the other portion mean negative equity in shared ownership properties is never a good thing.

Dealing with negative equity

Negative equity can certainly affect those who want to move home. But it can also affect those keen to remortgage on to a better interest rate or deal.

Most lenders will not allow homeowners in negative equity to move to a new mortgage product when their existing deal ends.

That can leave those in negative equity stuck on a lender's standard variable rate and, should interest rates rise, leave them at greater risk of repossession should they not be able to afford their repayments.

Negative equity advice

Fortunately, there are options for homeowners who find themselves in negative equity.

I'm in negative equity but need to sell my home
If you are in negative equity and need to sell your home you would need to make up the difference between your sale price and what you owe on you mortgage.

Alternatively, and depending on how big the difference is between your property valuation and your mortgage debt, you could consider making improvements to your home to boost its value on the open market and cover the mortgage shortfall.

You could look into using any savings to pay off a lump sum of your mortgage, but you should always seek independent financial advice before doing so and check with your lender to see if there are penalties for doing so.

Finally, you could explore renting out your property. You would remain liable for the mortgage repayments so these would need to be covered by the monthly rent you could achieve.

Moreover, you would need to factor in other costs such as landlord insurance, managing agent fees and ongoing property maintenance.

I'm in negative equity but don't need to sell
Your best option in this situation is to stay put.

If you can, and your lender allows you to without adding any penalties, you could try overpaying on your mortgage in order to close the negative equity gap.

This, alongside a growing market, should enable you to edge your way out of negative equity at which point you could consider selling your home.