As most people have bought a house with a mortgage, if they were to owe £150,000 to their lender, but at current prices their house was only worth £120,000, they would be in negative equity of £30,000.
The dangers of negative equity
Fear of falling into negative equity is an understandable concern. You are likely to have spent a number of years saving up a potential deposit on your first home. Consequently it is natural to be cautious about your money and purchasing when the going is good.
The situation for many existing homeowners in the UK has been bleak since the recession. Figures back in 2009 showed as many as 1.1 million UK homeowners found themselves in negative equity.
In essence, the threat of negative equity is only an issue in the event that you wish to sell your house. Negative equity does not alter the repayments on your current mortgage deal and it is hoped, in time, the markets will eventually rise simultaneously with the UK’s economic recovery.
What are the options for homeowners needing to move whilst in negative equity?
Unfortunately there is no easy solution to the issue of negative equity. Homeowners wishing to move on and purchase a bigger home or to simply move to a different part of the country may find themselves constrained until the value of their current property improves to the level of their mortgage value.
If you are desperate to explore your moving options despite the dangers of negative equity, your first port of call should be your mortgage lender. Discuss any available schemes that may allow you to borrow more than 100% of the value of your new home should you move. This is by no means a cheap option and is fraught with risk. You may end up paying a significantly higher interest rate on your mortgage.
Do you have alternative accommodation available? Perhaps there is space living with friends, relatives or in private accommodation? If so, you may, with your lender’s permission, choose to rent out your home to cover the mortgage repayments.
Beware some mortgage lenders increase their interest rates in order to allow you to rent out your property. Renting out a property incurs extra costs. You will also have to cover the cost of an Energy Performance Certificate, buy-to-let insurance, gas certificates etc.
The Mortgage Conduct of Business Rules points that a lender should “deal fairly” with homeowners in arrears. The lender must also “give consideration to the customer being allowed to remain in possession to effect a sale”. Consequently, if you simply cannot afford to live in your house, your lender must seriously consider allowing you to sell up regardless of whether the sale price covers the outstanding mortgage.
Indeed if your lender refuses permission to sell your house you have the option to apply to the county court for an order for sale under the Trusts of Land & Appointment of Trustees Act 1996. If appealed successfully, the court can rule in your favour and order a sale regardless of your lender’s objections.
For first time buyers, the impact of houses falling into negative equity means you are typically forced to put down a deposit of 20 to 25% of the purchase price – double the average deposit four years ago when the global recession struck in 2007. Consequently, saving for a house deposit has become ever more critical to purchasing your first home.
Use our cost of moving house calculator to work out how much it will cost for you to move house