Here, we explain what being in negative equity means and what you can do about it.
How does negative equity affect you?
Equity is the value of your property, minus what you owe on your mortgage. In other words, it’s the amount that you own.
Negative equity is often caused by falling property prices. If the value of your house or flat falls – you could owe more than your home is currently worth.
For example, if you bought a house for £300,000 with a mortgage of £270,000 and the property is now worth £250,000 – you would be in negative equity.
Remember – owning a home is a long-term investment and property prices can go up and down.
If you’re able to meet the mortgage repayments, negative equity isn’t necessarily an immediate problem. It becomes an issue if you want to sell, switch mortgage rates or remortgage with a new lender.
You’ll need your mortgage lender's permission before selling a property in negative equity.
Selling your home with negative equity will mean you’ll have an outstanding amount on the mortgage – plus any other loans secured against your home – that you’ll need to pay back after the sale.
If you don’t have the funds available to pay the shortfall, it may be difficult for you to sell.
Many lenders are unable to loan you more money than your home is worth. This can mean your options are limited when it comes to switching your rate or mortgage lender.
When your current mortgage deal ends, you may need to move onto your existing lender’s standard variable rate (SVR) until the situation improves. Some lenders do still allow you to switch mortgage rates, even with negative equity.
Keep in mind – the interest rates on SVR mortgages tend to be higher than most mortgage options, so your monthly repayments may increase.
If you’re only in negative equity by a small amount, it may prove temporary. A rise in property prices could take your equity back above zero.
Regardless of the current value of your home, continue to make your mortgage payments as normal. If you don’t need to sell the property, you can stay put and wait for your equity to build.
If you can afford to – and your mortgage allows it – you may be able to pay more towards your mortgage. As your mortgage balance reduces, it will give you a lower loan-to-value (LTV) ratio – reducing your negative equity.
Many lenders allow you to overpay up to a certain limit without incurring an early repayment charge (ERC) but not all do. It's important to check with your lender, especially the annual amount of overpayment allowed. For example, some lenders allow 10% of the mortgage balance to be paid as an overpayment per year.
Being in negative equity can put you in a tricky financial situation but help is available. For example, if you need to sell your home, or your existing mortgage deal is coming to an end, your lender can discuss your options with you.
If you're worried about paying your HSBC mortgage, we can help you put a plan in place.
If you’re buying a property, and you’re worried about going into negative equity, here are a few things you can do to try and avoid it.
Before you make an offer on a property, it’s important to work out what you can sensibly afford and question whether the property is worth the price the seller is asking for.
Research the value of similar properties in the area to make sure you’re not overpaying. And factor in any potential work that’ll need to be done to the property once you buy it.
It’s a good idea to arrange an independent survey. This can give you clear and impartial advice about the condition of a property.
The larger your home deposit, the more equity you’ll have in the property.
It’s not always easy to save for a house deposit, but if you can increase the amount you put down – you’re less likely to fall into negative equity.
When deciding on a mortgage, you have payment choices to make:
Interest-only mortgages can increase the risk of negative equity. This is because you only ever pay the interest charged on the amount you borrow – not the capital. Because you’re not paying off your mortgage amount, you don’t build equity in your home, so a fall in property prices could put you at risk.
You should review your repayment strategy regularly to make sure it will repay your mortgage balance by the end of your mortgage term.
With a capital repayment mortgage, your repayments include the borrowed capital, as well as interest – to make sure your mortgage is fully paid off at the end of the mortgage period.
If you’re trying to avoid negative equity, a repayment mortgage may be more suitable.
Think carefully before securing other debts against your home.
Your home may be repossessed if you do not keep up repayments on your mortgage.
