Negative Equity Mortgages

Facing negative equity can be worrying, but with the right advice, you should be able to limit the impact to your financial situation.

This article covers all aspects of mortgages and negative equity and the steps you can take to minimise the impact of being in negative equity.

What is negative equity on a mortgage?

Negative equity is when the property you have a mortgage on is worth less than the amount remaining on the mortgage. This is usually caused when property prices fall.

This is more common than you might think. Estimates at the time of writing say that in the UK alone, there could be as many as half a million homes in negative equity.

You are more at risk of negative equity if you have an interest-only mortgage since your monthly payments might only be covering the interest on the mortgage and you’re contributing nothing to reducing the debt you owe.

Mortgage negative equity explained

How about an example to put it into perspective? If you bought a £200,000 house with a £20,000 mortgage deposit you have £20,000 equity in the property and the debt you owe on the mortgage is £180,000.

If the value of your house falls below £180,000 you are in negative equity.

What to do if you think your mortgage is in negative equity

If you think you might be in negative equity, first you should find out for sure what your situation is.

Start by calling your lender to find out how much is outstanding on your mortgage.

Once you know how much you owe on your mortgage, ask a local estate agent to value your home so that you can understand the whole picture.

If you owe more on your mortgage than your house is currently worth, you are in negative equity.

Now you have a clear understanding of your situation, it only becomes an immediate problem if you want to sell your home. We’ll discuss this a little later.

How does negative equity affect my mortgage?

Negative equity needn’t necessarily affect your mortgage.

It’s a common misconception that being in negative equity means you will lose your home. This is not the case. If you keep up your monthly mortgage payments, your home is safe.

The only immediate problem comes if you want to sell your home when you’re in negative equity and we’ll discuss this a little later.

The type of mortgage you have will change how negative equity affects you…

Negative equity on fixed-rate mortgages

If you have a fixed-rate mortgage and you’re meeting your monthly payments on schedule, your best bet is to keep doing the same as you’ve always been doing.

You may look to make overpayments to resolve a negative equity issue. Make sure to find out if there are any penalties for doing so first though!

If you’re still in negative equity when you’re coming to the end of your fixed-rate term, you may want to address the negative equity before looking for your next mortgage deal, but if this is not possible, you might need to negotiate with your current lender or look for a specialist negative equity mortgage from another provider.

Negative equity on tracker mortgages

If you have a tracker mortgage and fall into negative equity, as advised above, you should keep paying your mortgage as usual.

As long as your mortgage isn’t interest-only, each monthly repayment you make will be helping to reduce your negative equity. Simply keep up with your usual payment schedule. Ultimately, you’ll eventually pay off your mortgage, clear the loan and own the property outright.

The upside of a repayment mortgage when you have negative equity is that you’ll get out of negative equity faster since every month you are working towards reducing the amount you owe against your mortgage.

Negative equity on interest-only mortgages

Unfortunately, things aren’t quite so straightforward with an interest-only mortgage since the only ways out of negative equity is for house prices to rise or to make overpayments providing the lender will permit them.

Generally, this will happen over time, but there’s no guarantee and since you’re not in a position to be able to influence the housing market there’s little you can do except wait it out.

If you aren’t comfortable waiting for time to take its course and want to be proactive in dealing with your negative equity, read the section below to find other possible solutions.

Negative equity on Help to Buy mortgage

The Help to Buy scheme works only alongside repayment mortgages, so the amount you borrow reduces over time. As discussed above, if you maintain your monthly repayments and stick to the usual schedule, you shouldn’t need to worry about negative equity as, given enough time, it will naturally resolve itself.

When it comes to selling your Help to Buy home, you’ll repay the equity loan at the same time. For example, if you had a 75% mortgage and a 5% cash deposit and have made no other repayments you’ll repay 20% of the value of your home when you sell.

Although you can sell your home at any time, you must get an independent valuation to determine what it’s worth.

As mentioned above, when you sell, the equity loan must be paid in full as a percentage of the sale.

In the event of a bankruptcy, the equity loan is still factored into things. Either yourself or the official receiver would need to report the bankruptcy to Target – who administer the Help to Buy scheme after completion – and they’ll liaise with the parties involved to try and solve it.

Whichever mortgage type you have, if you keep up with the payments on your mortgage as usual, the debt won’t be called in.

Although being in negative equity doesn’t mean you’ll lose your home, it can make life tougher and more expensive, read on to find out what you could do to make life a little easier, or better yet, get in touch with us.

Make a quick online enquiry and talk to one of the negative equity specialists we work with.

Negative equity on lifetime mortgages

If you have a lifetime mortgage when you die or move into long-term care, your home is sold and the money raised pays off the loan.

If there are funds left over after the loan has been repaid, the remainder is divided amongst your beneficiaries, according to your wishes.

If there isn’t enough money left from the sale to pay off the lifetime mortgage, your beneficiaries will have to repay any additional debt from your estate.

Most lenders offering lifetime mortgages also offer a no-negative-equity guarantee which protects you in the event that your property falls into negative equity. This guarantees that you, or your beneficiaries, will not have to pay back more than the value of you home, even if the debt is greater than the value of the property.

Talk to an expert about lifetime mortgages and ways you can protect yourself and your beneficiaries from negative equity.

Make an enquiry and we’ll put you in touch with one of the negative equity specialists we work with. They have access to mortgage lenders across the UK and will be able to answer all of your questions.

What are my options if I have a mortgage on a house in negative equity?

Although it may not immediately be apparent, you do have a few options if you have a mortgage on a house in negative equity:

1. Use some savings – reduce your mortgage by using your savings. If at all possible, it might be a good idea to try and work towards reducing your negative equity with overpayments on your mortgage.
   If you’re in a position to do this, you will need to check with your mortgage provider to see if your mortgage terms allow you to make overpayments without penalty.
   If you’re on a fixed-rate mortgage you may incur an early repayment charge which could make overpayments a futile exercise.
   If you can make an overpayment without an early repayment charge, work out how much you can afford to pay as a one-off or increased monthly payments. This way you can get out of negative equity sooner and keep your mortgage options open, should you wish to sell your home or make any other changes to your mortgage loan.
2. Wait it out – this is often the easiest and cheapest option if you’re faced with negative equity. As long as you continue to meet your mortgage payments according to the usual schedule, your home is not at risk.
   As mentioned above, if you have a repayment mortgage you’ll be reducing your negative equity position month by month with your mortgage payments.
3. Give the value of your property a boost – there are a few things you could do to increase the value of your property without having to spend too much money. Take a look at similar properties on the market nearby and compare the prices they’re on the market for.
   You may see opportunities where a few small changes might make a difference to the value of your home.
4. Get a loan to make up the difference – depending on the amount of negative equity you need to deal with, it might be possible to borrow the difference and use it to clear the shortfall on your mortgage.
   If there’s no other way to get rid of the negative equity problem and you want to move house, an unsecured loan is one way you could clear the negative equity on your property. Before committing to this route, you should make sure you can manage the repayments and getting the best possible rate.

Talk to an expert in unsecured loans with whole of market access and get the right advice before you make any decision. It’s important to take the right advice since taking out an unsecured loan will increase your debts and is likely to be more expensive than borrowing against your mortgage.

Call us on 0808 189 2301 or make an enquiry and we’ll put you in touch with one of the expert specialists we work with.

Negative equity buy-to-let mortgages

If you’re in negative equity and want to rent out your property, your best bet is to discuss this with your current mortgage lender.

If your lender agrees to let you keep your mortgage and rent your property to tenants, you might find that they’ll also:

• Increase the interest rate
• Want evidence that the rent will more than cover your repayments (usually by 125% or more)

Because the maximum loan-to-value limit on buy-to-let mortgages is often between 80% and 85%, You’re unlikely to be able to use an ordinary buy-to-let mortgage on a property which is in negative equity.

If you are able to pay off the negative equity with savings, you could then switch your mortgage to a buy-to-let.

How to get out of a mortgage with negative equity

If you don’t have the means to sort out your negative equity using savings, additional repayments or haven’t got the luxury of time on your side, and you want to move to a new house, you might want to consider a negative equity mortgage.

Although very few lenders offer this kind of mortgage since they’re a highly specialist area, they are a sure way to move away from negative equity to a fresh start.

Be aware that you may end up paying more interest when you add the cost of your negative equity to a new mortgage, and you’ll need to raise a deposit towards your new house too, so in practice executing the change could work out to be more expensive than you first imagined.

However, if you can afford the change, it may still be worth making the change because when your existing mortgage ends, you could end up paying an expensive variable rate of interest anyway.

This is because many lenders won’t allow borrowers with negative equity to switch to a new mortgage deal and will usually instead move people with negative equity to their standard variable rate, which can be expensive and undesirable.

Knowing this might be waiting for you down the road might persuade you to make a clean break now with a negative equity mortgage and establish yourself back on firm ground early, rather than wait and be faced with high costs at a later date.

How do I go about moving when I have a mortgage with negative equity?

Moving house when you have a mortgage with negative equity isn’t always straightforward.

Several factors play a part in determining how easy you might find it:

• the amount of negative equity you have
• the value of the new property you want to buy
• if you’re currently up-to-date with all payments on your existing mortgage
• how much deposit you have to put towards your new home

If you have savings which you can use to pay the difference between the value of your property and the outstanding mortgage debt, you can make a move more easily. Without this option, moving might be more difficult to achieve.

Remortgaging, although a nice idea, in theory, isn’t always possible to do with negative equity.

If your current mortgage lender can’t help, there are a few mortgage lenders who will offer a negative equity mortgage.

With a negative equity mortgage, you can transfer your negative equity to your new property but you will need to pay a deposit.

Make an enquiry and talk to a negative equity mortgage expert. The specialist advisors we work with have access to lenders across the whole of the UK and will know which ones to approach for the right negative equity mortgage solution for you.

How does a negative equity mortgage work

Only a very few lenders offer negative equity mortgages.

In short, negative equity mortgages allow you to move to a new house and carry the amount of negative equity you owe on your old mortgage with you.

Some lenders insist that you already hold an existing mortgage with them, but you might be able to find a lender willing to lend to you on similar terms.

When it comes to negative equity mortgages, It’s not so much a case of shopping around as knowing who to ask.

The negative equity mortgage experts we work with know all the mortgage solutions and the lenders behind them.

If you have questions or want to discuss your options with someone well-positioned to help, make a quick enquiry online and we’ll put you in touch with the right person to help answer all your questions.

Pros and cons of negative equity mortgages

Negative equity mortgages can be a great solution if you need to move and don’t have the time or funds to resolve your negative equity another way.

These are the pros and cons of taking out a negative equity mortgage:

Pros:

• You get to move house without the need to pay off the negative equity on your current mortgage. This could be an option if you have to move and haven’t got the luxury of time to make other arrangements to deal with your negative equity another way.
• There are a few lenders who might have schemes that offer help to all borrowers, which means you can apply, even if your mortgage is with another lender. The quickest way to discover this kind of scheme is to talk to a whole-of-market broker who has unlimited access to lenders across the whole of the UK.

Cons:

• You may be subject to early repayment charges on your current mortgage, this is particularly problematic if you’re in the early years of a fixed rate mortgage.
• There could be other additional fees and charges, and your new mortgage could have a higher interest rate too.
• Negative equity mortgages are offered by very few lenders, which can make it difficult to find the right deal.

How to get a mortgage with negative equity

Since so few lenders offer negative equity mortgages, the easiest and quickest route to finding a mortgage to suit your circumstances is by going through a specialist mortgage broker.

The advisors we work with have whole of market access and know which lenders offer mortgages to borrowers wishing to carry negative equity across to a new mortgage arrangement.

Call us on 0808 189 2301 or make an enquiry and we’ll put you in touch with someone who can make the process from sourcing the right lender to going through the mortgage application process less of an ordeal and more of a pleasure.

Negative equity remortgage options

When your existing mortgage arrangement comes to an end, you’re often likely to end up paying an expensive variable rate of interest if you don’t plan ahead to remortgage. The same is true when you’re in negative equity.

The problem is, if you have negative equity many lenders won’t allow you to move to a new mortgage deal and you’ll automatically be moved you to their standard variable rate.

Most lenders won’t allow you to borrow more than the value of your home. So if you owe £120,000 but your house is only worth £110,000, it could be difficult to find a new mortgage deal.

Since you’re likely to struggle to remortgage with negative equity the best course of action is to work towards getting out of your negative equity. The ways you could achieve this have already been discussed above.

You should start by talking to your mortgage provider to get a complete picture of what you owe and ask them if they would consider allowing you to move your mortgage to a new property.

Every mortgage lender is different but it might be worth having the conversation. If this is not fruitful, make an enquiry and we’ll put you in touch with one of the negative equity specialists we work with.

They know the lenders with special mortgage products specifically designed for people who find themselves in negative equity, and if remortgaging isn’t a viable option, they may be able to suggest a suitable alternative solution.

Negative equity joint mortgages

If you have a joint mortgage and your house is in negative equity, if you keep on paying the mortgage in the usual way, you have nothing to worry about. As discussed above, with a repayment mortgage you could get out of negative equity sooner with some agreed overpayments, or simply maintain your usual repayment schedule until you’re out of negative equity and back on track.

With an interest-only mortgage often the best thing to do is wait it out. As long as you keep up your mortgage payments, your home is not at risk of repossession.

If you have a joint mortgage with negative equity and you separate, things might get more complicated as selling a house with negative equity is hard to do and there are additional costs associated.

Unless one of you is in a strong financial position and willing to buy out the mortgage, and shoulder the negative equity problem alone, your best best is for one of you to remain living in the property. At least until the negative equity problem is resolved, either through planned mortgage overpayments or a rise in house prices.

Finding mortgage deals when you’re in negative equity

If you’re looking for mortgage deals when you’re in negative equity, your best bet is to talk to a negative equity mortgage expert.

The brokers we work with have access to and deep relationships with lenders across the UK and will be happy to answer any questions you might have about your situation and the kind of mortgage solution best suited to your circumstances.

Call us on 0808 189 2301 or make an enquiry and we’ll put you in touch with one of the negative equity specialists we work with.

What to do if you’re facing bankruptcy and you have a mortgage in negative equity

This can be very complex as no two bankruptcies are the same.

The job of the trustee or the receiver of the bankruptcy is to try as much as possible to get the debtors their money back. When a property is in negative equity, often they will not force a sale of your property because if the mortgage on it is on a repayment basis, there’s the possibility that it won’t be in negative equity at some point.

Alternatively, there could be speculation that your property may increase in value, thus bringing you out of the negative equity situation.

At the end of the day, it’s up to the people administering the bankruptcy what happens so no promises can be made with what will happen to your negative equity property.

If you’re facing bankruptcy or trying to buy a house following bankruptcy, call us on 0808 189 2301 or make an enquiry.

The specialist advisors we work with have experience in helping people in difficult circumstances and will be happy to answer any questions you might have.

What can you do when your negative equity mortgage becomes untenable

If you’re facing financial difficulties and have negative equity to boot, you need to face it head on. Although you might be tempted, the worst thing you can do is bury your head in the sand.

First thing’s first. Talk to your mortgage provider. Explain your situation and see what solutions they are willing to offer. Remember, it’s in their interest, as well as yours, to ensure a positive financial outcome.

If your lender does not offer a way forward, get advice from a debt advice charity like Citizen’s Advice or Shelter.

Alternatively, call us on 0808 189 2301 and speak to a specialist mortgage broker experienced with helping people who are facing tricky financial situations. The brokers we work with have whole of market access and may be able to find a mortgage solution to help get you back on your feet.

Location matters: negative equity mortgages if you live in Northern Ireland

Negative equity is a particular problem afflicting many homeowners in Northern Ireland, where the market has yet to recover from the financial crisis of 2008, when millions of people around the country suffered negative equity.

Negative equity in Northern Ireland remains a problem at the time of writing, more than a decade after the average house price plunged by 15%. Today, average house prices in Northern Ireland are still 30% lower than they were before the 2008 crash.

Because of the prevalence of negative equity in Northern Ireland, there are a few more options available to homeowners in NI.

• There are companies who charge a fee to negotiate with your mortgage lender to allow you to sell your home and write off some of what you owe.
  However, if you wanted to do this, you wouldn’t necessarily need to pay a middleman for such a service as you should probably be able to negotiate this sort of deal for yourself, if your lender is amenable to the idea.

• Banks and mortgage lenders in Northern Ireland also offer different mortgage solutions to borrowers with negative equity. One such mortgage is a Negative equity trade down mortgage.

Negative equity trade down mortgages

A number of banks in Northern Ireland have specialist mortgage products designed to help customers with negative equity problems.

Although it may be easier to make arrangements with your existing lender, you may find it easier to benefit from products provided by a new lender.

When you sell your existing home at current market value, the funds from the sale will go towards paying off your existing mortgage, any residual balance or negative equity will be covered by the new mortgage.

In essence, trade down mortgages consist of the full amount required to purchase the new property as well as covering the residual balance from the sale of your current home.

Naturally, lending criteria will vary from bank to bank but generally, you might expect the following:

• Loan to value from 140%
• Maximum term of 30 years (to maximum age 70)

Maximum loan amount will vary depending on the lender and your own mortgage affordability.

Negative equity mortgage calculators

Many websites and lenders offer various online calculators you can use to work out how negative equity might impact you.

These can be useful to give you a very rough indication of what you might expect, but since they are often a mash-up of averages from varying different sources, you’ll only ever be getting rough idea.

If you prefer to deal in facts you should get a valuation from a local estate agent and speak to a negative equity specialist.

The mortgage advisors we work with have whole of market access and are experienced in offering accurate, bespoke calculations. Advisors can then use the right facts to match you with the lender whose own calculator is likely to offer you lending terms you’re happy with.

Call us on 0808 189 2301 or make a quick online enquiry.