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Negative Equity

Equity is how much money you would make if you sell your home. Negative equity is when you find that your house is worth less than your mortgage and you will likely lose money in a house sale.

This can happen if your house has dropped in value, interest rates have risen a lot or if you’ve had trouble keeping up with your mortgage payments.

If you don’t plan to sell your home anytime soon, you won’t necessarily need to worry about negative equity – as long as you can still make your payments. However, if you need to sell your home, it can mean the profits from the sale are not enough to pay off the mortgage and you will still be left with a balance owed.

For example:

You own a home that is worth is £150,000, and you owe £180,000 on your mortgage – you then have negative equity of £30,000.

It’s important to remember though, that if your home rises in value, you may no longer be in negative equity. You can ask a local estate agent for a free valuation of your home and calculate that against your mortgage value to work this out.

What happens if you go into negative equity?

It’s important to know that being in negative equity doesn’t mean that you will losr your house. However, it can put you in an awkward position when it comes to your money matters.

If you sell your house, you wouldn’t make enough money to pay off your mortgage, which means you would be left to make up the difference. This makes moving very difficult as you won’t have any money to use as a deposit for your new home.

There is the possibility that your loan provider will agree to you moving with negative equity if you need to, but you will need to take what’s left of your outstanding mortgage with you.

If you want to remortgage your home, it’s unlikely that your mortgage provider would accept you for a new one. This is because your house won’t be able to be considered as enough security should you fall behind on payments.

Does negative equity affect your credit score?

Being in negative equity doesn’t necessarily have an effect on your credit score, but it can be impacted if you run into money troubles such as:

  • Falling behind on your mortgage payments
  • Needing to move but not being able to clear the balance left on your mortgage.
  • Not being able to afford payments on an interest-only mortgage that has gone up

How can you avoid negative equity?

If your home is in negative equity, there are a few things you may be able to do to help your situation.

We advise that you get several valuations of your house in order to get a fully accurate picture of how much your house is worth. This way, you have a starting point in order to figure out what to do going forward.

If you can, increasing your monthly payments to your mortgage can help you to reduce its size and bring you out of negative equity quicker. However, only do this if you can afford to; don’t stretch your budget as it can cause you problems elsewhere.

There are also ways you can increase the value of your home such as redoing your kitchen or bathroom. However, spending large chunks of money on things like this isn’t always guaranteed to give the value of your home enough of a boost to get you out of negative equity.

It’s also important to speak to your mortgage provider before doing any of these things to see if there are any early repayment charges.

If you’re struggling with negative equity and aren’t sure what to do next, contact us today. Our friendly advisors are on hand to work through your debts with you and are trained to give you the best advice for your situation.

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