If your property’s value falls below what you still owe on your mortgage, it means you’re in negative equity.
This can be a real problem if you want to sell your home or get a good remortgage deal when your current term ends.
But, it’s not the end of the world. You might even be able to take action and reverse it. So, if you’re worrying about negative equity, here’s some steps you could take.
Overpay your mortgage
Do you have any savings or money that has been set aside? If you have been saving for an emergency, being in negative equity might just be the event that causes you to dip into them. If you can afford to do so without seriously stretching your finances, overpaying on your mortgage could be the best way to reduce what you owe. Your main priority should be reducing your Loan to Value to less than 100%.
Your LTV is the size of your outstanding mortgage against the amount your home is worth. So, if you owe £120,000 on your mortgage, but your home is now only worth £100,000, your LTV would be 120% - which means you’re in negative equity. To get this figure to below 100%, you would have to overpay your mortgage until the amount outstanding is the same as, or less than, the value of your home.
This takes you out of negative equity and should make it easier to sell your home or find a remortgage deal if you choose to do so.
Remember, some lenders charge you for repaying your mortgage in full early and they may also have a limit on how much you can overpay by. Usually they will let you overpay up to around 10% of your total mortgage balance in a year, but it’s best to speak with your lender first.
Wait it out
Unless you’re in an urgent rush to move, it might be best to hold off and wait it out for as long as you can. As house prices can (and often do) change without warning, it could be the case that your home increases in value by enough to bring you out of negative equity.
It’s impossible to say whether your home will start increasing in value after time, but if you’re in no rush to move or switch mortgage deals, it’s probably best to wait. After all, the longer you wait, the more you should have paid on your mortgage too.
To give you an idea of how your home’s value might be affected, you could check out any plans your local council has for the area. You may find new builds like schools, public parks, extra transport links or shops and restaurants nearby could boost your home’s value.
Consider home improvements
In some cases, you might want to consider home improvements if you have savings set aside, as this could help increase your property’s value. And the work may also mean your current home suits your needs better so you don’t have to move anyway.
By doing this, you could turn your house into a home for life and you may even see its value bump up by as much as 10%. There’s no guarantee on how much you’ll increase your property’s value by doing this, but adding an extra bedroom is usually guaranteed to add a few pounds to your home.
But, if you’re sure you want to move out, your savings may be better put towards overpaying your mortgage. And there’s always smaller and cheaper home improvements you could carry out to ensure it’s in tip-top condition when you do decide to sell.
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Intelligent Lending Ltd (Credit Broker). Capital One is the exclusive lender.