Confused.com’s step-by-step guide to negative equity
Getting into negative equity is a homeowners’ nightmare – one which, unfortunately, more and more people are now suffering.
The January 2009 figures from the Halifax House Price Index show the value of the average property has fallen nearly £36,000 since its peak in July 2007.
As a result, anyone who bought a home at the end of 2006, with a deposit of 5% or less, is now likely to find they owe more on their mortgage than their home is worth - the definition of negative equity.
But while this may seem like a dire position, it’s important not to panic. Sue Anderson, of the Council of Mortgage Lenders (CML), says: “While negative equity might be frustrating, it’s not a problem unless you find yourself in payment difficulties or needing to move.
“There are plenty of simple steps you can take to improve your equity position, especially with low interest rates, meaning many more people can afford to overpay their mortgage.”
For homeowners who do worry about slipping into negative equity, or for those who think they may already be in it, Confused.com has a number of steps to improve the situation…
Step 1
The easiest way to get out of negative equity is to reduce the size of your mortgage. This might sound impossible, but with interest rates falling to record lows, cheaper borrowing costs are on your side. First, shop around and compare mortgage rates to see if you’re getting a good deal. Then, if you do remortgage, consider using any savings you make to overpay your loan.
Step 2
If you’re already on a variable rate mortgage, such as a tracker deal, you’ll have seen a sharp fall in your monthly repayments since the Bank of England first began to aggressively cut interest rates in October 2008. Someone with a £150,000 mortgage who is not on a fixed-rate deal will have seen monthly repayments fall by around £350 during this time. Consider using this money to overpay your home loan as it will not only reduce the amount of capital you owe, but could also reduce the amount you pay in interest each month - meaning more of the money will be used to erode the outstanding debt.
Step 3
Homeowners on interest-only deals could also consider switching to a repayment one. While this will not make a big difference immediately to the amount you owe, it may mean you start to reduce your mortgage, rather than just relying on house price rises to provide you with an equity cushion.
Step 4
Alternatively, building up a lump sum in a savings account, which can be used to plug any shortfall, can be a good idea. This option’s particularly worth considering for homeowners who would incur penalties for overpaying a mortgage. By saving £500 a month, you’ll build up a fund of £12,000 over two years, which could make the difference between being able to repay the mortgage when you sell your home, or not.
Step 5
If you’re a first-time buyer who’s worried about negative equity, you can avoid the problem by saving up a bigger deposit. Not only will this help escape owing more on your mortgage than your home’s worth, but it could also mean you qualify for a lower mortgage rate.
Step 6
Negative equity is only a problem if you need to move. So rather than trading up the property ladder, homeowners could consider extending their existing property or converting the loft instead. Doing this could also increase the value of your home, which may reduce or even wipe out the shortfall you face. But, if you are currently in negative equity, your lender’s unlikely to increase your mortgage, so you’ll have to find an alternative way to fund the work.
