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You are in negative equity if your property is worth less than the amount you owe on your mortgage or a secured loan. This usually only happens if property prices fall after you buy your home. It can be difficult to sell your home or get credit if you are in negative equity.
What causes negative equity?
Equity is the difference between the value of your home and the amount you borrowed to buy it. If you bought a £100,000 home with a £75,000 mortgage, you have £25,000 in equity. If the value of your home drops to £50,000, you would probably have £25,000 in negative equity.
Negative equity can happen during an economic recession if property prices fall. You are more at risk of negative equity if you have:
- fallen behind on your mortgage repayment,
- borrowed a large proportion of the property's value,
- increased the size of your mortgage when property values were high,
- taken out secured loans using your home as collateral,
- taken out a mortgage with high interest rates.
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Can I sell my home?
You can still end up owing your lender if you sell your home when you have negative equity. You must pay back everything you originally borrowed even if the money from the sale doesn't cover the cost of your mortgage.
Your lender can still take legal action against you even after your home has been sold. This will affect your credit rating. It is unlikely that you will be able to:
- get a new mortgage with a different lender, or
- take out any other loans using your home as collateral.
You can sell your home in the normal way if you have enough savings to pay off the negative equity and the costs involved in selling . If you don't, it may be better to wait until property prices rise and your home increases in value. Your benefits may be reduced if you sell your home.
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Do I need my lender's permission?
You usually need to get your lender's permission before selling. You may also need permission from other creditors if you have secured loans. It may be easier to get this if you have realistic plans to pay off everything you owe. For example, you are planning to sell personal belongings to clear your debts.
Contact an advice agency if your lender won't give you permission to sell. An adviser may be able to help you to negotiate. It may be possible to:
- argue that selling privately will allow you to pay off your debts more quickly,
- convince your lender to let you keep the same mortgage but transfer it to a new property.
You could apply for a bigger mortgage to allow you to move to a new property and pay off the negative equity. However, increasing your mortgage will usually increase your debts and mean that you must pay higher interest rates.
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Will my home be repossessed?
Your lender can't repossess your home just because you are in negative equity. However, there's a risk that your home may be repossessed if you fall behind with your mortgage payments.
Repossession doesn't happen automatically. Your lender may let you stay in your home and if you can come to an agreement about how you will pay off the arrears.
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Should I let my lender sell my home?
Only let your lender sell your home as a last resort, there is usually a better option. Your lender is unlikely to get as high a price for it as you would if you sold it, because many lenders sell repossessed properties at auction.
You will still be responsible for your monthly payments until the sale is completed. Selling may take a long time, so the amount you owe could increase considerably. You may also have to pay rent when you move somewhere else.
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