The truth about negative equity
Filed under: House Prices
While it is certainly an issue, with the latest figures from Halifax suggesting a 20% slump in average property prices since their peak in 2007, are the consequences of negative equity really as dire as they seem?
Mortgage Advice & Info
Negative equity occurs when the value of your mortgage outweighs than the value of your home. Prior to the credit crunch, it was an unfamiliar concept to many as they enjoyed rising property prices during the boom. Yet when property prices started to wobble and decline in 2008, many borrowers who had taken out home loans of 100% loan-to-value or more found themselves in the unfortunate position of negative equity.
For example, if a couple borrowed £150,000 to buy a house worth £150,000, only for the property to fall in value to £135,000 – they couple would be in negative equity of £15,000.
While it might seem like a scary concept, the situation isn't that bad for everyone. "Negative equity is only really an issue when you come to remortgage or sell your home," explains Mark Harris, chief executive of mortgage broker SPF Private Clients. "Otherwise, it's just a matter of sitting tight and waiting for property prices to recover, which historically they tend to do over time."
Recent figures from the Council for Mortage Lenders show that 827,000 households were in negative equity last year, yet like many experts, Kate Faulkner, managing director of Designonproperty.co.uk, insists is it not a widespread issue. "It is only the small number of people that have to sell where it becomes a problem and even then, there are many solutions to help."
Negative equity is most prevalent in areas that have experienced the biggest drops in property prices, including the West and East Midlands and Yorkshire and Humberside.
Yet the rest of the country is not sheltered from the problem as the Royal Institution of Chartered Surveyors recently reported London as the only region with rising house prices in a recent study.
The issue of negative equity is also indicative of a two-tier mortgage market, where those with smaller deposits struggle to obtain new loans or remortage and those with properties in less desirable areas struggle to sell. This is in stark contrast with those with big deposits or homes in popular neighbourhoods who can more easily raise cheap finance and find it far easier to sell up.
It is hoped that the Bank of England's new plan to boost the mortgage market under the Funding for Lending scheme will pull down costs for those for low deposits and little or no equity, with banks and building societies able to access up to £80bn of cheap money and rewarded for lending more.
What to do about it
If you are struggling with mortgage payments, it is usually advised to shop around and remortgage onto a more affordable deal with a lower interest rate and lower monthly payments. Unfortunately this can be tricky for those in negative equity, as lenders reserve their best mortgage rates to those with significant deposits or similar levels of equity in their home.
So, Harris advises talking to your existing lender to see if they can help. "Quote the Financial Services Authority initiative 'treating customers fairly': ask whether it will offer you access to another fixed or tracker rate, particularly if you would struggle to pay your mortgage if you move onto your lender's standard variable rate.
"It is also worth talking to an independent mortgage broker as they will know what options are open to you. If you have savings, another option may be to pay down some of your mortgage debt to give you a stronger equity position, thus enabling you to remortgage."
Indeed, if you are in negative equity yet your mortgage payments are manageable, overpaying is a good way to get yourself out of it. Brian Murphy, Head of Lending at MAB explains: "In the current low interest rate environment it makes sense to pay down borrowing wherever possible. Take a look at your mortgage terms and conditions and see if you can either overpay on a monthly basis or make one off lump sum payments."
And finally moving house is not out of the question if you are in negative equity, but it is more difficult and will depend on your lender. "Nationwide will allow borrowers to move mortgages and take their negative equity with them," adds Harris.