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UK Homeowner Advice For Selling Your House Fast

By Ben Kennish

What Happens if You Have Negative Equity? – Seven Negative Equity Solutions

What Happens if You Have Negative Equity? – Seven Negative Equity Solutions

Having negative equity on a property can make it incredibly difficult to sell – as if it can’t be difficult enough as it is!

negative equity advice

Today, we’re going to be taking a look at negative equity in depth, what happens if you have negative equity, and what the seven solutions are to negative equity if you’re trying to sell a property.

What Actually is Negative Equity?

Before diving in at the deep end with the problems and solutions surrounding negative equity, it’s important to ensure we’re all on the same page as to what negative equity actually means.

  • Before negative equity, comes equity. So what is equity?
  • Having equity on your home is the value of the property itself, minus any money that you owe on the mortgage you’ve secured against the said property. So an example would be, if your home was worth £150,000, and your mortgage balance was £100,000, then your equity would be £50,000.
  • So if that’s equity, what is negative equity and how is it acquired?
  • The definition of negative equity is when the market value of your home has fallen below your outstanding mortgage balance that you’ve secured on the said property. This is usually a result of property prices reducing within the market.
  • So, an example of this would be, say that you bought a property for £200,000, using a mortgage of £180,000. Then, in the property market, the value of the property falls to £160,000. Your negative equity would be at the balance of £20,000.
  • However, negative equity doesn’t just happen as a result of falling property prices on the market. It also happens when mortgage companies lend out more than the property was worth in the first place – so mortgages that 125% of the market value of the house for example.

If you took out this type of mortgage, you’d be in negative equity from the moment you actually moved into the property.

How Will I Know if I’m in Negative Equity?

The problem is, until it comes to selling time, a lot of homeowners don’t even know that they’re actually in negative equity. So that begs the question, how can you find out if you’re in negative equity?

You Could Calculate its Market Value

  • You could take it upon yourself to calculate the market value of your property. There are several different ways of doing this.
  • There is actually a tool on websites such as Zoopla, that enables you to very simply type in your street name and postcode, and it’ll give you an estimation of how much your property is worth. Emphasis on the word, estimation.
  • Think of this tool as a way of starting out, as it has been known to over and undervalue properties. It’s not gospel, but it gives you a bit of an idea.
  • There are also websites available that enable you to look at the recent sales prices of properties in your area – and even in your neighbourhood if it’s applicable. Be sure to research the most recent sales price, as remember the property market is constantly subject to change.
  • You could also enquire with multiple estate agencies about valuing your home. Getting an overview from several professionals will aid you in figuring out the average of what your house would be worth on today’s market.
  • Alternatively, you could hire a professional surveyor to come around and value the property. This could give you a more accurate valuation on the property than the previous methods, but you’re likely to have to pay for the service. Plus, they’re likely to use the same process as an estate agent, who could offer you the service for free.
  • Weigh up these options, and figure which is best for you.
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negative equity of your property

Figure Out How Much You Owe on Your Mortgage, and Take it From There

  • The next step is figuring out how much you owe on your mortgage, and take it from there. Of course, you’ll still need to know the valuation of your property.
  • If you have an up to date mortgage statement, then you should have easy access to this information, as it will tell you your outstanding balance.
  • If you don’t have one, then it’s just as easy to call your mortgage lender and find out directly from them. It’s really that easy.
  • Once you’ve figured out your outstanding balance, the next stage will require you to subtract the amount of your outstanding mortgage from the current market value of your home. This will give you a basic idea of what sort of equity you’re in.
  • However, if your outstanding mortgage amount is actually higher than the current market value, then you’ll know you’re in negative equity. The opposite way, and you’ll have equity on your home.
  • It isn’t only negative equity in its extreme that causes issues for selling property though. If the two amounts are similar, then it could lead to issues when you come to sell your property.
  • This is because as well as selling your property, you’ll also have to pay legal fees and so on. These are usually subtracted from equity when you sell your house, but if you’re lacking in it, then you’ll have to pay these charges yourself.

What Will Happen if I Have Negative Equity?

So, that’s what negative equity is and how it comes about. But what will happen if you do find out that you have negative equity?

  • You’ve done all of the above calculations, and you’ve guessed it, you’re in negative equity! So what comes next?
  • Well, if you aren’t considering selling your property in the near future, or at all, then chances are it’s not actually going to affect you all that much.
  • However, chances are if you’re sat reading this today, then it is an issue for you – or could be in the future – because you’re thinking of selling your house.
  • So if that’s the case, what can you do about it?

Dealing with Negative Equity: Our Top Seven Solutions

Finding out you’re in negative equity when you need, or want, to sell your property can be difficult. You can feel incredibly trapped, and like there are no solutions to your problems – but there are!

We’re now going to share our top seven solutions on how to deal with negative equity if you’re selling your house.

  1. Increasing the Value of Your Home

The first of our top seven solutions to selling a property with negative equity, is aiming to increase the value of your home.

  • As we’ve previously stated, negative equity stems from the value of your property being less than the outstanding amount you owe on your mortgage. So what better and more logical way to get out of it than by increasing the value of your home?
  • If we’re talking in relative comparison, the more you can boost the value of your home, the lower your negative equity amount becomes. Makes sense, right?
  • You’ll be surprised at how easy it can actually be to increase the value of your property in the eyes of the market, and furthermore potential buyers.
  • It can be as easy as decluttering, clearing and even painting the rooms in your home. This makes each part of the space look more refined, and therefore more desirable. It can also make rooms look bigger, which always helps to increase value.
  • Likewise, make the most of any spare space you have! If you have a spare room that you use for storage and laundry, turn it into a bedroom. An extra bedroom can really boost the value of your property.
  • Furthermore, you can spend money on increasing value of the property by renovating and paying a professional to redecorate if you feel it’s necessary.
  1. Use Your Savings

Our next solution, is to use money from in your savings in order to pay part of your mortgage.

  • If you can use money from your savings in order to pay some of what you owe off your mortgage, then the interest rate is likely to go down.
  • If you have the right amount of money in your savings, you could even use them in order to pay off the difference between what you owe on the mortgage, and what the property sells for on the market at the given time.
  • If your savings are less than the amount that you’d have to pay off on your mortgage in order to match up to what the property sells for, then this is often referred to as a negative equity trap.
  1. Overpay on Your Mortgage

If you can afford to and are in negative equity, you could start overpaying your mortgage on a monthly basis.

  • This literally just means paying an additional amount on a monthly basis, which can help to bridge the negative equity gap that currently exists. You can change your direct debit or set up a standing order to do this.
  • Unfortunately not everyone can afford to do this, as their monthly payments may already take up the majority of their income as it is. You could take a look at your spending habits and try and budget in order to achieve this, if it’s something you’re interested in doing.
  • A prime example of wasteful monthly spending would be on a streaming service that you no longer use, or a gym membership that’s wasted. Instead, put this money into paying additional costs on you mortgage in order to try and bridge the gap.
  • This is only a solution if you’re figured out that you’re in negative equity before you’ve put your property on the market, as it’s a slow burner.
  1. Take Out Another Loan

Another option, would be taking out a further loan in order to pay off your negative equity.

  • Although this may seem like a quick solution, remember that you are literally putting yourself in further debt.
  • When it comes to loans, there is usually also an interest rate to be considered. This won’t be a secured loan, which generally means that interest rates are more expensive.
  • Likewise, if you have a bad credit rating, then you aren’t likely to be accepted on this kind of loan.
  • If you want to borrow at a reasonable rate, then you need to have a good credit score – which makes this solution irrelevant to those that don’t.
  1. Don’t Move, Stay Put

This is a bit of a counter-solution really, but if your negative equity is going to cause you selling issues, why not just stay put where you are?

  • A lot of the time, negative equity causes people to feel trapped, because they aren’t able to up and move as they’d like to. But if you can’t sell your property and don’t have the funds to pay it off, what other solution do you have?
  • You never know, if you can bide your time and stay in the house that you’re in, then the property market could possibly pick up, and therefore your home could increase in value – ultimately bridging the negative equity gap that is causing you so many issues at current.
  • Again, this requires time and patience. If you don’t have the luxury of time, then this isn’t really a viable option.
  1. Become a Landlord

Our penultimate solution to negative equity, is the possibility of you becoming a landlord.

  • If the idea of becoming a landlord appeals to you in some capacity, you could choose to rent out the property rather than sell it.
  • Before considering this option, it’s worth looking at how being a landlord would affect you. It’s a lot of responsibility, and also comes with added taxes.
  • These taxes include the extra 3% stamp duty, and the abolition of tax relief on landlords.
  • Due to decisions made by the government, a lot of people find the notion of becoming a landlord somewhat unappealing.
  • However, if the rent you charge your tenants does cover your mortgage payments, then this could help you to pay the rent or put down a deposit on your new home.
  1. Speak to an Expert

Last of all, but by no means least, if the experts can’t help, who can?

  • We’ve given you solutions to the best of our knowledge on how you can deal with your negative equity, but what if none of these work for you?
  • It might be that you don’t have the time to commit to them, don’t want to become a landlord or that you don’t have access to the finances that we’ve suggested above – and that’s okay! It’s perfectly normal, in fact, and is probably more common than not.
  • However, there is help out there. Never think of negative equity as an “end of the line” sort of situation. Instead, think of it as an obstacle that can be easily overcome with the right help.
  • It’s easier than ever before to find the right people to help you, and as we’ve proven, there is an abundance of information and advice for free on the internet.

So reach out to someone who can help, whether that be a friend, an estate agent or a financial advisor. Feeling trapped is difficult, particularly in your own home, but it doesn’t have to be like that.

It might be a slow, gradual process, or you might find a quick face. Remember that everyone is in an entirely different circumstance, so don’t be hard on yourself.

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Think logically, speak to an advisor, and come up with a plan of action. We hope we’ve helped you on your way!

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