Negative equity is a difficult situation to be in, and unfortunately it means you’re unlikely to be able to remortgage.
But it’s not a situation that has to last forever. Read on to find out what happens when your current mortgage deal comes to an end if you’re in negative equity, and what you can do to help fix the situation.
What’s negative equity?
First things first – what exactly is negative equity? Well, it’s what happens when the value of your home is less than the amount you owe on your mortgage.
But if you put down a deposit worth thousands of pounds and have been paying your mortgage each month for a while, how can this be? Well, luckily, it’s not quite as big a risk as it was a decade ago, but negative equity does still happen.
Before the property market crash and recession of 2008, 100% mortgages were more widely available. This was a mortgage that would provide the full value of the property being purchased, so the buyer didn’t have to pay a deposit.
This meant that when the housing market crashed and property values started to fall, some homeowners found themselves in a position where their property’s value had fallen by more than they’d paid towards their mortgage. As a result, they were left in negative equity.
Today, it’s very difficult to find a mortgage where you don’t have to put down a deposit of between 10% and 20%, which can work out as tens of thousands of pounds. This can take a long time to save, but it also gives you a larger safety net – the value of your home would need to fall quite dramatically for you to be stuck in negative equity.
That’s not to say it doesn’t happen, though. So, if you’re in negative equity, what happens to your mortgage?
Can I remortgage?
Before you start to panic, as long as you keep paying your mortgage every month, your home shouldn’t be repossessed just because you’re in negative equity. Just make sure that you don’t fall behind with your payments.
But what happens if your current mortgage deal is reaching an end? Well, usually in this situation, either you would switch automatically to your current lender’s Standard Variable Rate (SVR), or you’d start looking around for a new deal – either with the same lender or with a different one.
This is known as remortgaging, and part of the application process involves the lender considering how much equity you have in the property to work out what rate you’ll be charged. If you’re in negative equity, you have no equity in the property.
The more equity you have in your home, the better deal you’re likely to be offered, as the lender will see you as less of a risk. If you have no equity in your home, and in fact owe more than it’s worth, you present a far greater risk as a borrower.
Because of this, you’ll struggle to find a new mortgage deal with a different lender – or even with your current lender. Instead, the most likely outcome once your current mortgage deal is up is that you’ll switch to your lender’s SVR.
What happens to my mortgage?
As we said, being in negative equity doesn’t mean you’ll lose your home, as long as you keep paying your mortgage. And you don’t have to apply to remortgage to switch to your lender’s SVR – it happens automatically at the end of your deal.
Be aware that SVRs can be quite a bit more expensive than other mortgage deals, so it’s likely your monthly repayments will increase. Your lender will have considered whether you could afford this when you first applied, but make sure you budget for it accordingly and don’t start to miss payments.
What can I do?
Selling your home is unlikely to be the answer to negative equity. You’d need to sell it for more than you owe your mortgage lender in order to clear this debt, and if your property is worth less than you owe, this will be very difficult.
To get out of negative equity, you need to get the amount you owe on your mortgage down, and the value of your home up. There are a few ways to go about this.
If you can afford to do so and your lender lets you, start to overpay your mortgage. While overpayments are not always an option on fixed and tracker-rate mortgages, SVRs can be more flexible.
Providing you can afford to, it’s worth paying more towards your mortgage each month. This will help you clear your mortgage debt and put you on the road out of negative equity faster.
Depending on why you think your home’s value has fallen, you could consider home improvements if you can afford them. Things like double glazing and central heating – if they’re not already present – can help to push up the value of your property. Again, this will help you escape negative equity.
Realistically, reversing negative equity is a bit of a waiting game. It may take a few years, but, providing you keep paying your mortgage, the balance should start to tip in your favour.
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