Moving home can be a combination of the most exciting and stressful time in someone’s life. It signals a new chapter, which is cause for optimism. Yet there are many aspects that go into the process which need taking into consideration. One of those might be the fact that you could be moving home with negative equity.
Being in a position where the value of your home is less than the mortgage you owe can lead to worrying circumstances. There is a myriad of reasons why people decide to move, from selling because it’s time for something new to needing to move for work.
Whatever the final decision for choosing to find a new home, those who want to sell their house but are in negative equity will likely find it harder. This may lead them to feel like they’re in a negative equity trap.
But does having negative equity mean all is lost, or are there ways to successfully move to a new home while owing more than your house is worth? In this article about moving home with negative equity, we will look at:
- What is negative equity?
- How to identify whether you’re in negative equity
- What negative equity means for your current home and your mortgage
- Ways to reduce negative equity
- How to move home if you’re in negative equity
- Negative equity mortgages
- More advice if you have negative equity
Read on, and find out everything you need to know about the negative equity.
What is Negative Equity?
When someone buys a home, the mortgage is typically a percentage of the overall price and, over time, the property often rises in value. The difference between the amount owed and the overall value further increases, tipping the scales in favour of equity a homeowner has in the property.
Example of Equity:
If you buy a home for £250,000, and the mortgage owed is £150,000, the equity in the property is £100,000. If the property’s value rises to £300,000, and you pay £50,000 off the mortgage, your equity has grown to £200,000.
When a home is worth less than the mortgage owed on it, a state of negative equity occurs. At this point, the value of the property is less than the mortgage owed.
The primary driver for negative equity is falling property prices, which can cause the value of your home to decrease while your mortgage stays the same. If the value dips below the amount owed, you will find yourself in negative equity.
Example of Negative Equity
If you buy a property for £200,000 and have a mortgage of £175,000, but the home’s value falls to £160,000, you would find yourself in negative equity.
Negative equity isn’t a significant trend in the UK, but there are a considerable amount of homes that fall into the category – especially since the housing crash in 2008. Properties on interest-only mortgages are more susceptible to negative equity.
How to identify whether you’re in negative equity
How to identify whether you’re in negative equity in a snapshot:
- Look at property valuation tools
- Contact your mortgage lender to find out how much you owe
- Ask a local estate agent to value your home
Identifying whether or not you’re in negative equity is something you will likely need help with. There are ways to check yourself, such as looking on property portals like Zoopla where you can see how much your home is worth. Then you can compare it to the amount owed on your mortgage.
However, it’s worth noting that Zoopla – or any online valuation tool – is purely an estimation and shouldn’t be taken as a concrete valuation. The best way to find out if you’re in negative equity is by contacting your mortgage lender and see how much you owe.
The get in touch with a local estate agent and ask them to provide a valuation of your home. If the property is worth less than the amount you owe on the mortgage, you will be in negative equity.
What Negative Equity Means for Your Current Home and Your Mortgage
There are many pros and cons for buying a house, but having negative equity means the decisions you take require even more thought. The fact of the matter is that selling your home in negative equity is an issue.
It may even mean not moving at all if it’s on the high side. The majority of lenders won’t let people carry over negative equity and take out a new mortgage, making it difficult to remortgage your home or move onto a fixed rate. Most lenders also won’t allow people to switch to a new deal when their existing mortgage ends.
Sometimes it can be worth holding off on selling your home. This is especially true if your negative equity is relatively low, as property values change and you may find that a rise in house prices see your home go back into the black.
Ways to Reduce Negative Equity
There are ways to reduce negative equity in your home before selling. For some, paying off negative equity is possible. Others have options if they remain in the tricky situation of negative equity finance but want to reduce the overall figure.
Pay off Some of Your Mortgage
Do you have any savings or is it possible to delay moving while you pay off some of your mortgages? Lowering your mortgage balance is the best way to decrease negative equity.
Let Your Home
You can get consent from your lender to let your property and move into a lower-priced rental home in the short term. It is possible to use the rent on your home to pay the negative equity.
Make improvements around the home to raise its value. If you choose this option, make sure that you consult with a surveyor to see how much value home improvements could add to the overall price of your house.
Wait for Market Conditions to Improve
Staying in your home and waiting for market conditions to improve could see your home increase in value without you needing to do anything. This could remove negative equity on the property.
Get a Loan
It might be worth looking into a loan to cover the shortfall between the sale price and the amount owed on the mortgage. However, taking a loan does involve an element of risk as the cost of the loan repayments might be high.
How to Buy a House With Negative Equity
Despite the problems around moving with negative equity, there are still ways to sell and get the keys to your new home. Whether you can move home or not with negative equity depends on several factors:
- The amount of outstanding negative equity
- The value of the home you want to buy
- Amount of deposit you can raise
- Credit history and whether you’re up to date with payments for your existing mortgage.
Negative Equity Mortgages
It’s best to talk with your current lender to see which mortgage options are available. A small number of lenders offer ‘negative equity mortgages’ which can help you move to a new home.
Taking out a negative equity mortgage involves transferring the outstanding money you owe to your new property. You will still need to pay a deposit for your new home, however.
The number of lenders who offer negative equity mortgages is slim, though Nationwide will consider applications.
You may also be expected to pay early repayment charges on your existing mortgage, as well as extra fees on your new mortgage – which could have a high-interest rate.
Ultimately, the decision comes down to your need to move home. If it’s a pressing matter, it is worth looking into negative equity mortgages.
More Advice If Your Home is in Negative Equity
There are several places where you can get advice if you find yourself in negative equity finance. It’s worth talking to your mortgage lender first – especially as you won’t be able to sell without their permission.
You can also speak with Citizen’s Advice or Shelter in England and Wales. For people located in Scotland and Northern Ireland, you can speak to Citizens Advice and Shelter Scotland or the Housing Rights Service.
Ultimately, selling and buying a home with negative equity is far from ideal. It doesn’t have to be all doom and gloom, though – there is a light at the end of the tunnel. The most important things you can do include:
- Talking to your lender
- Understanding the amount of your negative equity
- Looking at ways to reduce negative equity
- Exploring negative equity mortgage solutions
- Speak to official bodies such as Citizens Advice and Shelter.