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Selling a House with Negative Equity

Selling a House with Negative Equity

With lenders predicting that house prices may fall between -2% and -4% in 2024, it's understandable why potential sellers are nervous about what the future holds. History has proven that when the market value of your property decreases, there is a risk of finding yourself in negative equity through no fault of your own.

If you were planning on selling your home but being in negative equity is giving you pause for thought, we're here to remind you that there are still options available:

What is Negative Equity?

If the market value of your home has fallen below the amount you still owe on your mortgage, you are in negative equity. It may sound alarmist, but it is sometimes referred to as being "underwater" on your mortgage, which conjures up images of an action movie star on a sinking ship gasping to find pockets of air to keep breathing.

Let's say you purchased a home for £200,000 and had signed up for a mortgage of £180,000. If a property valuation has revealed that it is now worth £150,000, but you still owe £170,000 in mortgage repayments, that means you are in negative equity to the tune of £20,000. Since that indicates you owe £20,000 more than your home is worth, it's easy to see why that can be a cause for concern.

But remember: Negative equity does tend to be a by-product of decreasing property values in a housing market downturn. That said, it can also happen as a result of making small down payments or taking out second mortgages.

Can You Sell a House in Negative Equity?

Yes, the good news is that you can still sell your home when you are in negative equity, but it is more complicated. After all, the biggest motivation behind selling a home is to make enough of a profit to repay your outstanding mortgage, as well as putting you in good financial standing to move elsewhere.

By finding that you are in negative equity, you may feel that you are at a disadvantage, unable to provide the extra funds to pay off your lender when you complete a sale. This is why many homeowners often delay the decision to sell, particularly during a downturn, with everyone biding their time until the market picks up.

What Happens If You Sell a House in Negative Equity?

By choosing to sell a property that is in negative equity, there are a couple of things that could happen. If your home sells for less than you owe, you will have to make up the difference to repay your mortgage and so that you cover the shortfall.

In some cases, your mortgage lender may agree to accept less than the outstanding mortgage balance when you sell. However, you still owe the shortfall, so negotiations will need to be made to ensure you pay what is due.

One way of doing this is to add the shortfall to a new mortgage, as some lenders may allow you to transfer the "debt" to a new mortgage on another property. Again, the onus is on you to ensure that this is paid.

Here's where things get problematic. If you are unable to pay the shortfall, there's a risk that your mortgage lender could pursue legal action against you to recover the debt. Of course, nobody wants that, which is largely why people avoid selling altogether until such a time that their mortgage equity status is more favourable.

What causes negative equity?

Negative equity can be driven by various factors that lower house prices and homeowners' equity, including:

  • Decreases in Property Values: This is primarily caused by a general downturn in housing market prices across a specific area or nationwide, diminishing the resale value and equity for numerous homeowners.
  • Overpayment at Purchase: Homeowners who pay too much for their initial purchase or take on excessive borrowing face a greater risk of negative equity, especially if property prices drop shortly after purchase.
  • Poor Lending: Lending that permits buyers to secure loans exceeding their financial capabilities or market conditions predisposes them to negative equity should property values decline.
  • Financial Challenges: Issues such as unemployment, debt accumulation, rising interest rates for variable mortgages, illness, or any reduction in income can make mortgage repayments difficult, leading to increased sales and foreclosures that push down local property values.
  • Natural Disasters: Events like storms and floods can damage areas, devaluing the remaining properties. This leaves homeowners with less valuable homes while still owing the original mortgage amount.

How Do You Calculate Equity in a Home?

Here is a simple formula you can use to calculate the equity you have in your property:

Home value - Amount owed on mortgage = Positive equity

Let's assume that the value of your home is £250,000 and you owe £200,000 on your mortgage. Your equity would be £250,000 - £200,000 = £50,000.

This means that your positive equity is £50,000. That's the portion of your home that you own outright.

When it comes to negative equity, the formula works like this:

Home value - Total mortgage owed = Negative equity

Now, imagine for a moment that the value of your home has decreased by -10% and is now worth £200,000. At the time you originally bought it, it was worth more than that, so naturally you took out a mortgage totalling £220,000 to pay for it.

With this in mind, take a look at the £200,000 (the current house value) and subtract £220,000 (the amount you owe on your mortgage). Since you are £20,000 short, you are in negative equity.

How Do I Work Out If I’m in Negative Equity?

The first step to figuring out if you are in negative equity is to find out what the current market value of your home actually is. This is quite easy to do if you follow these steps:

Step 1: Get an estate agent or a surveyor to value your home based on current market prices in your local area.

Step 2: Check your latest mortgage statements to find out the outstanding balance and amount still owed on your loan.

Step 3: Compare the two figures to see if your mortgage debt is higher than the property's value.

Step 4: If your mortgage debt is higher, subtract the property value from the amount owed to determine the negative equity amount.

If you feel you need more advice, get in touch with a financial advisor or maybe even your mortgage lender to help assess your equity status.

How Do I Get Out of Negative Equity in My House?

You’ll be relieved to hear that there are some options available to you if you want to get out of negative equity:

Option 1: Wait. In many situations, negative equity is a temporary problem that will resolve itself once house prices start rising again.

Option 2: Pay down your mortgage above and beyond your monthly fees. If you have savings, you can lessen your negative equity by making additional payments.

Option 3: Make improvements to your home to increase its value. If you get a brand-new kitchen or renovate your property, this may help push up the market rate.

Option 4: Rent out your property. If you have a spare bedroom, for example, getting a tenant could generate the extra income you need to help pay down the mortgage.

Option 5: Go for voluntary repossession. You can eliminate your debt if you surrender the property to your mortgage lender, but remember, this will adversely affect your credit score.

How to Avoid Negative Equity

If you are not currently in negative equity, but you want to avoid being in that situation, here are some tips:

  • Make a down payment of at least 20%: This could help you avoid owing more than the value of your home.
  • Favour getting a fixed-rate mortgage: This way, your monthly payments won't increase even if rates do go up.
  • Ensure you choose an affordable mortgage term: A fixed-rate mortgage over a five-year period, for instance, is a sensible commitment to make as opposed to staying on a variable mortgage rate for a long length of time.
  • Do your research on the housing market: The more you familiarise yourself with boom-and-bust cycles, the less anxious you will feel.
  • Buy a home in areas where prices have historically been trending upward: This will give you the assurance that the value of your home won't drop significantly.
  • Consider scaling back property development ambitions: Since negative equity mainly impacts those with itchy feet who view homes purely as assets (i.e., buying cheap, renovating, selling up at a profit, and moving out), staying put and thinking long-term can be more beneficial.
  • Also, don’t forget to keep up to date with your mortgage payments: If you miss a few, it could lead to repossession, so paying your mortgage must always be a priority.

Can I Remortgage If I’m in Negative Equity?

Remortgaging is usually very difficult if you have negative equity, as mortgage lenders are reluctant to lend in these circumstances. However, it may be possible in some situations if you can:

  • Switch to a better rate with your existing lender
  • Extend your mortgage term with lower payments
  • Get a secured loan to cover the negative equity
  • Add a guarantor to make lenders more willing to provide a new mortgage
  • Wait for the equity to improve as prices potentially rise

It’s always worth speaking to a broker to see if remortgaging might be an option, but being in negative equity does lessen your bargaining power.

How Upstix Can Help

If you want to sell a property with negative equity, Upstix offers you a quick solution by finalising a purchase in just 7 days. We can provide up to 85% of its market value and by covering expenses otherwise spent on agency fees, you can move fast and avoid the threat of repossession.

For homeowners who have a second home with negative equity, for example, and want to cut their losses, Upstix is a speedy and reliable option. With our expertise, selling your "underwater" mortgage property becomes much simpler and hassle-free.

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