How does negative equity affect me?

It’s an unfortunate fact that as the economic crisis continues, houses will continue to lose value, and more households will fall into negative equity.

Your equity includes any deposit you have put down on your home, any payments you have made towards your mortgage, as well as any natural increase in the value of your home since you bought it. Negative equity occurs when the value of your home has fallen so much that selling it would not cover your mortgage.

Technically, any decrease in the value of your home eats into your equity first. Until the loss value exceeds your equity, you will still be able to sell your home and make a ‘profit’, enabling you to move into an equivalent (or more expensive) home. Once the loss in value exceeds this, though, you are in negative equity.

But what does this mean to you? Is it always a bad thing?

Why negative equity is bad

First and foremost, negative equity will make selling your home difficult, unless you are in a position to pay any shortfall in the amount you owe on your mortgage and the amount you can get from the sale of your house.

For example, if you have a £100,000 mortgage but can only sell your home for £80,000, there is a remaining £20,000 which you will still owe to your mortgage lender, and will be expected to repay accordingly. The only way you can make that up is by paying a lump sum or agreeing to pay it back by monthly instalments. However, this may affect the amount you have available to afford a new mortgage payment.

Similarly, it will be incredibly difficult to remortgage, since lenders will not want to renew terms on a £100,000 mortgage that would only gain them £80,000 should you fall behind on payments and the house is repossessed. If you come to the end of your existing mortgage terms and you are in negative equity, you will usually have to start paying your lender’s SVR (Standard Variable Rate) – which is usually a lender’s most expensive rate.

On the other hand…

Negative equity is only a major problem if you are looking to remortgage in the near future, or if you are looking to move. It is possible to move home – but it is likely that you will be left with a debt to repay in addition to your new mortgage or rent payments.

However, if you are planning on staying put for the time being, at least until house prices begin to recover, and are not planning to remortgage, it should make no real difference to your circumstances.

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