Negative Equity

Negative equity – when you owe the mortgage company more than your house is worth – affected more than 1 in 20 people, at the end of 2011. Another 16.6% were on the brink of negative equity. However, negative equity is not a major problem – until you want to sell your home

Stay put

  • If you can, stay in your home and slowly pay off your mortgage
  • Give it a few years and prices might rise and you will find yourself in positive equity
  • This will either be because property prices have risen, or because you have paid of some of your mortgage
  • Negative equity only becomes a problem when you sell your home, or if you want to borrow against it

Reduce your debt

  • If you have some savings use it to pay off some of your debt. Mortgage rates are almost always higher than savings rates, and you also pay tax on savings interest, so the best return you can get on any spare money you have is to pay down your mortgage
  • Most mortgage companies allow you to pay off up to 10% without penalty, though smaller repayments are also helpful. Check your contract to make sure

If you are struggling with your mortgage repayments you could end up having to sell your house. This is a problem at the best of times, but is a particular problem if you are in negative equity. But there are a number of steps you can take to avoid repossession – watch out for our new guide – How can I avoid repossession? (Coming soon)

Seek professional advice

  • Because you could end up in serious debt you should seek professional advice
  • Speaking to a real person with experience is far more efficient than trawling through the internet. You can explain you position, and they will be able to give advice tailored to your situation
  • There are a number of places you can go for free, confidential, independent, unbiased and professional advice. Citizens Advice Bureau, Shelter and National Debtline

Sell and repay shortfall over time

  • Most mortgage lenders will allow you to sell your home and then pay off any shortfall over a period of time.  But this is clearly not an ideal solution
  • You will need your mortgage company’s permission to sell for less than the mortgage is worth
  • You will also need somewhere to live, and to pay all the hidden costs of moving which can total in the tens of thousands

Allow your home to be repossessed

  • This should be avoided if possible
  • Public auctions of repossessed homes tend to attract lower prices than private sales, so you will end up owing your mortgage company more than if you had sold your home yourself
  • Your credit rating will be bad for at least six years, making it more difficult to get a mortgage in future
  • The mortgage lender will be able to pursue you for up to six years for any outstanding debts

Declare bankruptcy

  • The worst option, because after you declare bankruptcy it is very difficult to borrow money again for many years
  • You also cannot act as a director of a company, and face a number of other restrictions
  • Your mortgage lender will still be able to take your home
  • It may be worth considering if you fall into very serious negative equity, and do not believe you will be able to repay your debts for many years after you have sold your home
  • Ensure you get good legal advice before declaring bankruptcy