Put simply, negative equity is when the amount of money that you owe on your house is greater than the sale value if you were to try and sell it now.
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
It's normal to be concerned about negative equity. Especially as you are likely to have spent a number of years saving up for the deposit on your first home. It is natural to be cautious about your money and purchasing when the market is good.
The likelihood of falling into negative equity will often depend on the current housing market. For example if average house prices are down and interest rates are high, negative equity will be more prevalant.
However, the threat of negative equity is only an issue in the event that you wish to sell your house or remortgage with a new lender. Negative equity does not alter the repayments on your current mortgage deal, and so it may simply be a matter of wating for the housing market to rise and take you out of negative equity.
Read more about protecting yourself from negative equity.
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.
Speak to your lender
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. You may be able to increase your mortage repayments, therefore reducing the amount you owe more quickly, bringing you out of negative equity. They may also allow you to sell your home and repay the outstanding balance on your mortgage over time. Some lenders may also allow you to transfer negative equity to a new home, though this is fairly uncommon.
You could also 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.
If you need to move elsewhere but you cant sell your property, you may, with your lender’s permission, choose to rent out your home to cover the cost of mortgage repayments.
Be aware, however, that 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.
Updated July 2022