First of all, what exactly is negative equity?
Negative equity is when the value of your property is less than the amount of your mortgage. For example, if you bought a property at a peak of the market with a 10% deposit (therefore a 90% mortgage) for £200,000 and then find that the market dips and your property is worth only £170,000 at the new market value you would owe the mortgage lender £180,000. That means that you would owe £10,000 more than your property would be likely to sell for in that market. That is negative equity.
Are you likely to be affected by Negative Equity?
The good news is that negative equity won’t affect most of us when you consider the total number of mortgages holders in the country (11.8m).
The other important fact to consider is negative equity in itself is not a problem unless you are trying to sell or need to re-mortgage. So don’t worry about it if you don’t need to.
However, if you do plan to sell your property or to re-mortgage and you bought your house at the peak of the market (2007 for example) and had very little or no deposit, you may well be in negative equity. However, that is not always true as it will depend on your location and your specific property. If for example you live in a sought after school catchment area, such as Fielding Primary School’s catchment area in Ealing, or you live in a particularly unique and special property, you may not be so affected by dips in the market. In fact, Greater London in general tends to be more resilient than other areas of the UK.
If you are worried about whether you are in negative equity, take a look at your local area. Are properties still selling? Has your neighbour’s house been on the market for over a year? If you aren’t sure about your specific situation, call your local award winning estate agent Northfields Estates and we can give you an idea of what your house would be worth in the current market. You can request your free valuation online or call us on 0208 840 6666 to find out where you stand.
Once you have idea of the potential sales price your property could achieve in this market, it’s time to crunch some numbers. Start by getting a balance from your mortgage lender showing how much equity you have and compare it with the current value of your home.
If you are re-mortgaging click here to use this handy re-mortgaging calculator to see if you could save money on your mortgage.
What do you do if you are in negative equity?
If you do not have to sell – just stay in your property. As long as you can pay your mortgage and are not forced to sell, it is best to sit tight and wait for prices to rebound until your property is worth as much or even more than you originally bought it for.
If you have to move – Don’t panic. Try and pay as much of your mortgage off as possible and aim to have at least 5% equity before you sell. One option may be to rent out your property and cover all if not most of your costs and either move back home for a while, share with friends or rent something that you can afford. It is best not to sell your home if you are in negative equity as you will still owe your lender the full amount, even if you do not have it to pay them. For help with finding a reliable tenant at the best rental price, call our award winning lettings team on 0208 567 6660.
Prevention is better than a cure
Don’t let the thought of negative equity keep you up at night. Take a few preventative measures to ward off the dreaded negative equity.
Save for a deposit. If you save money for a deposit then you will have built in equity. Saving can be difficult, but certainly worthwhile. If your mortgage allows it, you may want to pay extra towards your mortgage, but make sure that you don’t overstretch yourself, because if you overpay the mortgage you are unlikely to get the extra back from your lender.
The best way to guard against negative equity in the future is to buy a property with the intention of remaining there for 5-10 years. Gone are the days when people saw property solely as an investment that they would resell in 2 years for a profit. When you buy a property to live in, think of it as buying a home.
Think about what you might need in a property in 5-10 years time – are you planning on having children? Will you have a dog? Do you need an office space for that business you dream of starting? Buy a property that fulfils your needs for the medium term and not just the short term. Life will of course come up with some surprises, but it is best to have at least thought about what the future may hold and what property would best suit the possibilities.
If you are worried about negative equity, call our sales team on 0208 840 6666 for help and free advice.