Dealing With Negative Equity
Since the credit issues first hit in 2019 and with the effects of the subsequent recession still being felt very strongly, the housing market has sustained one blow after another.
Where once house prices seemed to be caught in an ever-upward spiral, today many areas have plunged back to the price levels of 2006, resulting in a significant number of homeowners being caught in the trap of negative equity.
Negative equity occurs when the mortgage outstanding on a house exceeds the current market value of that property. For this reason, it tends to affect first-time buyers with smaller deposits the most, along with those who have recently remortgaged heavily to release equity. With a small deposit, even a slight percentage drop in the market can result in negative equity, making it nearly impossible to obtain remortgages or sell without making a loss.
There are ways to avoid the dreaded negative-equity trap however. If remortgages aren’t available to you with your current lender, look around to see if there are any available remortgages for people in your position. Just check the terms of your existing mortgage first, so that no penalties will be incurred if you change lenders. Remember too that negative equity is only a problem if you’re either looking to sell or investigating remortgages. If you can avoid selling, then do. If you can’t find a favourable remortgage, then investigate options to over-pay on your existing mortgage to build up your equity in your home. As get closer to 10% equity or more, you’ll find that the range of remortgages available to you opens up.
Most mortgage providers will allow regular over-payments up to a certain amount. Avoid going over this limit, though, as there may be penalties attached. Alternatively, it is often possible to reduce the mortgage term and so pay more each month without penalty. Just be aware that these payments will not be flexible. It may be that saving into an ISA and then making a lump-sum payment works for you. Speak to your mortgage lender to find out what is available and possible.
There are different ways to bring in extra income as you seek to boost your savings or pay down the mortgage. Taking in a lodger can be an option if your lender and insurance provider will allow it. Some have even resorted to renting out their homes and moving to smaller rental properties for the duration (again though, you must have permission from your lender.) Overtime, second jobs, cash back sites and budget shopping are all ways that households are using to increase their income and minimise costs, so don’t rule anything out.
Mortgages more than house value make negative equity
Talking to your lender is key and, as a general rule, you should make contact before considering a way to avoid negative equity in your home. With three-million homeowners currently experiencing the problem, lenders are well placed to offer advice. There may be other options available, such as switching on to an interest-only mortgage for a period of time. If your mortgage lender sees you taking responsibility for your repayments, engaging with them proactively and not sticking your head in the sand, they are more likely to work with you in times of difficulty.
Another useful strategy is to take out income-protection or mortgage-protection insurance in case you lose your source of income. This will provide money to cover your repayments should the worst happen. However, as with remortgages, do shop around for the right policy, as prices and cover vary wildly.