03 Jul PROPERTY EXPERT: HOW TO COPE IF YOU FALL INTO NEGATIVE EQUITY
As fears of a house price crash grow, the forgotten spectre of negative equity could soon be menacing the UK property market again.
Negative equity happens when house prices plunge until your home’s market value is less than the mortgage you took out to purchase it.
Commenting, property expert Jonathan Rolande, from the National Association of Property Buyers, said: “If prices fall in the way that some are predicting negative equity which affected so many millions of people following the financial crash in the 1990s will likely strike again.
“Currently, there are relatively few people in this position because prices have remained at quite a high level and the reductions we have seen so far have simply eroded the gains made during 2022. Those most at risk are people who bought at the very top of the market, around July 2022, paid full market value and took a high percentage loan. Those on interest-only products will also be adversely affected because they are not reducing the amount outstanding each month.”
Here Jonathan shares his guide on what you need to know if you are worried about falling victim to negative equity.
What is negative equity?
Contrary to what many people think, negative equity isn’t just the fact that a property price has dropped, or even that a home is worth less than the price paid. Negative equity is when a property is worth less than the mortgage on it.
Should you worry?
Yes, but how much you worry should depend on your own circumstances. Easy to say. The reason is, negative equity, whilst bad from a psychological point of view, does not cause any issues if you are living happily in the property. The problems only arise when you wish to move or re-mortgage, for example, to get a better deal. If you aren’t moving or re-mortgaging, the loss is only ‘on paper’ and eventually its likely that prices will rise again one day, lifting the property out of negative equity.
However, the effect of knowing that they are ‘trapped’ in a property that cannot be sold can have a detrimental effect on mental health as well as lifestyle choices such as job moves, relocation, emigration or starting a family. In other words, negative equity seriously impacts mobility and decision-making.
Is it possible to move when you are locked into negative equity?
Yes, except there are some buts. The easiest way to do this is to sell the property and simply top up the shortfall between sale price (after costs) and the mortgage using cash savings but clearly this isn’t viable for most people in this position.
If your mortgage has been run well during your time as a borrower, some lenders will grant a mortgage with negative equity where you transfer the loss to your next home – useful but not a nice way to begin life in the new property.
By obtaining the lender’s permission some choose to rent out the property and sell later when prices have risen. This can work well but it is risky.
What if prices don’t recover?
If prices do begin to drop more quickly, it is bad news for everybody – even those who are hoping for a crash as an opportunity to buy a property because it will become much more difficult to do so. There is a small but very real possibility that a large drop could happen.
What are the best steps I can take?
If you are worried about falling into negative equity I suggest paying as much of the capital off the mortgage as you can afford but check for any penalties first. The higher your equity and lower the mortgage, the less chance of falling into this very difficult situation.
If you have any way to cut expenses and/or increase income, now is the time to do it. There could be stormy waters ahead.
