Negative equity on your house, bungalow or any type of property can have a significant impact on your finances and make lifestyle changes harder to achieve.
Negative equity means selling your home or remortgaging could be a difficult process, because your house would be worth less than what you borrowed to buy it.
Discover what negative equity is and how you could improve your situation.
What is negative equity?
You may have heard the term before, but might still be unsure what the meaning is. If your house is in negative equity, it means the property itself is worth less than the mortgage.
What does negative equity mean?
Usually, it means your home’s value has dropped. This can be due to a variety of circumstances.
For example, let’s say you bought your property with a mortgage for £100,000, but today your property is only worth £80,000. That would mean your home is in negative equity.
While houses often increase in price, it’s also possible for their value to either stagnate 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 be sure of the current value of your property. To find out if your home is in negative equity, you’ll need to do a few things.
- Contact your mortgage provider to see what you currently owe on the property.
- Once done, 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 is above, below or matches 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?
It can occur in various ways, with some of the most common including:
- Physical changes to the property.
- Falling house prices.
- High borrowing at high loan-to-value rates.
Borrowing could also include taking out additional secured borrowing after buying your home, such as remortgaging.
You’re also at risk of negative equity if you purchased an interest-only loan, making capital growth your only option to rebuild equity.
Does negative equity affect my credit score?
Your credit score reflects 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?
It’s difficult to remortgage your home with negative equity, as most lenders won’t accept your application.
If you’re trying to switch your mortgage to a fixed or cheaper rate that’s better aligned to your property’s value, there’s a few things to consider:
- Lenders will analyse your finances, which means a valuation of your home equity.
- Lenders may see you as a bigger risk. This could lead to rejection of your remortgage.
- You’re more likely to be moved onto a lender’s SVR (standard variable rate) at the end of your current fixed term, which could mean higher payments.
Before you sign for a fixed deal, lenders consider your ability to repay. If your situation has changed and you don’t think you can meet your new repayments, you’ll need to advise your lender to find an appropriate solution.
Learn more about remortgaging.
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:
- the amount of equity you have.
- the current value of the new house you plan to move into.
- whether you have a good history of keeping up with your existing mortgage repayments.
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.
When moving to a new home with negative equity, you may not have to catch up on your equity right away, depending on:
- your mortgage’s repayments.
- your deposit.
- the differential in your equity.
When budgeting your repayments, it’s worth considering that without paying any remaining equity, your new mortgage may come at a higher rate.
If you’re looking to switch lenders before the initial fix is over, you should also consider any costs you may incur, for example:
- Exit fee costs
- Mortgage fees
- Valuation fees
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’s 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 reduce over time.
While owning a house in negative equity can have its drawbacks and impact other financial areas of your life, it’s possible to manage and turn the situation around.
Find out more about equity and remortgaging your property with Norton Finance.