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A guide to negative equity and remortgaging

Negative equity can be a stressful situation for homeowners. Find out more if you’re thinking of remortgaging but worry about the impact of negative equity.

Negative equity on your house, bungalow or any type of property can have a significant impact on your finances, making big lifestyle changes harder to achieve.

Negative equity can make selling your home or remortgaging a difficult process if your home is currently worth less than what you borrowed to buy it.

Find out more about what negative equity is and how you can help improve your situation.

What is negative equity?

If your house is in negative equity it means the property itself is worth less than the mortgage.

Usually, a property incurs negative equity because its value has dropped. An example would be if you originally bought a property with a mortgage for £100,000, but today the property is only worth £80,000. Because the property is valued lower than the mortgage you borrowed, this results in negative equity.

While houses often increase in price, it is also possible for their value to either stay the same or decrease, resulting in negative equity.

How do I know if my house is in negative equity?

Unless you have regular house valuations, you might not know the current worth of your home.

To find out if your house is in negative equity, you’ll first have to contact your mortgage provider to see how much you currently owe on the property. You will then need to schedule a valuation, which can be carried out by an estate agent or surveyor.

With this new information, you can see if the value of your property matches, is below or above what you owe on your mortgage. When the value of your home has fallen below what you bought it for – and assuming your mortgage is the same – it will be in negative equity.

How does negative equity happen?

Other than something physically happening to the property to reduce its value, negative equity can happen in different ways.

The main cause of negative equity is falling house prices, coupled with borrowing at high loan-to-values. This could have included taking out additional secured borrowing after buying your home.

Negative equity can also occur if you bought the property with an interest-only loan, making capital growth your only option of equity rebuilding.

Does negative equity affect my credit score?

Your credit score is a reflection of your finances and spending behaviour. It doesn’t change the worth of your properties or belongings. Even if you find yourself in negative equity – and providing you meet your mortgage repayments – your equity shouldn’t impact your credit score.

Can I remortgage with negative equity?

Remortgaging your property with negative equity is improbable, as it is unlikely that either your current lender or a new one will accept your application.

If you’re looking to change your mortgage to a fixed rate or a cheaper deal that better matches your property value, lenders will analyse your finances. This includes an evaluation of the amount of equity you have in your home at the time of your remortgage request.

If you’re in negative equity because the outstanding balance left to pay is higher than the overall value of your home, lenders will see you as a bigger risk and likely reject your remortgaging application. It’s more likely your lender will move you on to its standard variable rates (SVR) at the end of your current deal or fixed term, meaning higher payments.

Before you’ve even signed for a fixed deal, a lender will consider your repaying abilities once you’ve hypothetically switched to their SVR as part of your original application. However, if things have changed and now you don’t think you can afford the increased repayments, you will need to discuss this with your lender to find an appropriate solution.

Can I move house with negative equity?

Selling a house in negative equity to move elsewhere has unique complications, but it is possible. Your chances of moving to a new home depend on:

If you struggled with repayments once you moved onto your lender’s SVR at the end of the fixed term, lenders will also consider this during your application for a new mortgage.

There is a chance you may not have to catch up right away on negative equity when moving to a new house. It really depends on how much negative equity you have, if you are up to date with the repayments of your existing mortgage, and how much you can raise for your new home’s deposit. However, without paying the remaining equity, your new mortgage will likely come at a higher rate, which you should consider when budgeting your monthly payments.

If you’re looking to switch lenders before the initial fix is over, you should also consider the costs this may incur. You may need to pay a significant amount as an exit fee, although your new provider may be happy to add it to the balance on the new mortgage.

What can I do to stop negative equity?

There are two effective options to help you prevent potential negative equity:

Increase your home’s value

One of the best ways to gain equity on your property is to increase its value. Aside from general repairs, think about aspects of your home you can develop to make it more appealing to potential buyers. If you have a cellar or attic, and it is safe to do so, consider converting it into another bedroom or living space.

You can also extend your living areas by adding a conservatory leading out into your garden. Anything that makes the property bigger or modernises it can greatly improve its value.

Reduce your debt

Increase equity on your home by overpaying on your mortgage, reducing your debt. You’ll first need to speak to your mortgage advisor to see if it is possible to overpay your mortgage without incurring an early repayment charge.

Then assess your finances to evaluate how much extra you can pay each month. This will help reduce your negative equity, as the remaining balance will quickly become less over time.

While owning a house in negative equity can have its drawbacks and impact other financial areas of your life, it is possible to manage and turn the situation around. Find out more about equity and remortgaging your property with Norton Finance.


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