For the homeowners among you, negative equity can be two scary words. Enough to bring on the sweats and heart palpitations that Nightmare on Elm Street used to when you were 13. For some homeowners (my friend included), it isn’t even something that enters their head; how can this be a thing?! Property is bullet proof, right?!
Make sure you know what’s what with your home. After all, for many of us, it’s the biggest investment we’ll ever make. Make sure you’re always clued up.
What is negative equity?
In simple terms, negative equity is when your house is worth less than your mortgage balance.
To use an example, if your house is worth £150,000 but the balance left to pay on your mortgage is £160,000 then that shortfall of £10,000 is your ‘negative equity’.
It’s the big black hole of negative money that came out of nowhere.
How can this even happen?
Well, as well all know, the property market is not the sure fire money maker we all thought it was. There are a number of reasons for negative equity, but the two major ones are:
- Falling house prices: If you buy your house when it’s worth £150,000 and take out a £100,000 mortgage to pay for it then you’re be laughing; no problem at all, as long as house prices continue to go up. However, if you take out a £100,000 mortgage and your house value plummets to £80,000, then suddenly you find yourself in negative equity of £20,000.
After the recent crash of 2007/8 this is the situation many people found themselves in. Through no fault of their own, the housing market just collapsed and left them with outstanding mortgages that were worth far more than the new value of their homes.
- A LOT of borrowing: It stands to reason that if you buy your house for £150,000 and take out a £150,000 mortgage to pay for it, then you’re a lot more vulnerable to a fall in the market. Even if it falls just a little, you will find yourself owing more than your house is worth, because you have borrowed the exact amount of the value. Again, this if fine in a market whose value increases exponentially, but that is not the case with the housing market (as we all bore witness).
Because 100% mortgages used to be a real thing that people could get, this meant that as soon as the market collapsed people found themselves in negative equity.
It’s also a huge part of the reason that 100% mortgages are now no longer a real thing that anyone can get.
How do I figure out if I’m in negative equity?
The only way to find out is to do the math.
Firstly, phone up your mortgage lender and find out exactly how much you still have left to pay on your mortgage. Then, get someone out to value your property.
If your house is worth more than your outstanding mortgage then you’re in the clear. If not, well then, you’re in negative equity. And, as with all difficult financial situations, it’s always best to know exactly where you stand so you can get the best information to help you tackle the problem.
So I’m in negative equity, what does it mean for me personally?
It’s not all doom and gloom to be in negative equity. In some ways it’s frustrating and costly, because you are stuck paying back a mortgage on something that is no longer financially ‘worth’ what you’re paying for.
However, let’s remember that the primary reason to buy a house is to live in it. Something that seems to have got lost of late. Therefore, if you can afford to keep making your mortgage payments as you have been doing, it doesn’t really have a massive effect on you. If you are struggling to make ends meet at the end of the month then we have a few everyday savings tips for you that could help out.
As I’ve said, the housing market is not a static beast; therefore it could easily be the case that if you stay put for another few years you will see your house value jump back up again and your negative equity cure itself overnight without you lifting a finger!
If you wish to move home, however, then it’s a different game. Depending on how much negative equity you have, you may still be able to move home. Some lenders have a specific ‘negative equity mortgage’ which effectively allows you to tag the outstanding balance onto your new mortgage and continue paying it off. It won’t lift you out of your negative equity, but it gives you freedom of movement.
As with all things financial: knowledge is God. Inform yourself before you make any big financial decision and get the best expert advice you can.