Don’t be panicked by negative equity!

by John Fitzsimons on 22 June 2009  |  3 comments
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Ignore the hype – negative equity is not the end of the world! And there are things you can do to protect yourself against it.

Journalists love a hysterical headline. And there are very few subjects which attract headlines of a hysterical nature quite like negative equity.

Just last week, the Bank of England published some data which revealed that somewhere between 700,000 and 1.1 million households may be in negative equity. I think you can guess how certain news outlets presented the news - somewhere between the end of the world and Susan Boyle losing her voice on the old hysteria scale.

The trouble is that such reporting is often combined with talk of borrowers in arrears and facing repossession, or even rising unemployment, with no explanation of any link between such circumstances and negative equity.

At no point do these pieces ever properly explain the effects of negative equity in a balanced way, relying on us to accept that it is automatically 'a bad thing'.

Well, I want to right that wrong!

What is negative equity?

Let's get a quick definition out of the way.

Negative equity is quite simply when the outstanding mortgage you have on your home is higher than the value of your home.

Why is it bad?

Well it isn't, unless you are planning to move house (or remortgage) in the near future. If you are planning to move on up the housing ladder, negative equity becomes a bit of an issue, as you don't have equity to use as a deposit on the next property.

Equally, if you want to remortgage, chances are you will not be able to do so as there haven't been too many 100% loan-to-value remortgage deals knocking about for a while, so you will be stuck on the standard variable rate (SVR).

Though, in the current climate, that's not such a bad thing with some SVRs offering really competitive rates at the moment.

Of course, if you are not planning to do either of those things, and are happily settled in your home, meeting your mortgage payments each month, then negative equity is completely and utterly irrelevant.

It does not in any way mean you will lose your home!

The 'R' word

So, how come negative equity gets linked with arrears and repossessions in the press?

In truth they are unrelated, except that if you are already struggling with your monthly payments, then being in negative equity can make things worse.

It stands to reason that if your house is worth less than you borrowed to buy it, and you have to sell it because you can no longer afford your mortgage, there is going to be a shortfall.

Some lenders will allow you to 'port' your mortgage across if you buy a new place, but my advice would always be to discuss the situation with both your lender and your broker.

Should the worst happen, and you get repossessed - and remember this is very much the worst case scenario, generally lenders do not actually want to repossess - then you may be chased for the shortfall if the lender does not make back the money they lent initially when the property is sold on.

But let's keep some perspective here. Negative equity does not cause you to fall behind on your payments, or your home to be repossessed!

If you are struggling with your payments, you should get advice and quickly. But that should be the case no matter how much equity you have.

If you want some ideas on who to talk to about debt, have a read of Get out of debt with free advice.

I'm in negative equity - get me out of here!

Hopefully, you feel a little calmer now about what negative equity actually means. It's not the end of the world by any stretch, but it can be a problem should you want to move home.

So how do you protect yourself against it? And if you're already in it, how on earth do you get out again?

Obviously, if you are in negative equity, or at risk of it, the best way to resist this is to build up the equity you have in your home.

If you can afford to do so, most mortgages allow you to overpay your mortgage by up to 10% a year without slapping you with extra charges, so that's a good start.

If you have savings you can use, brilliant, but even if you cannot afford 10%, any overpayment will help you cut your mortgage debt quicker.

Raise some money

If you want to start paying off more of your mortgage, but don't currently have the cash to do so, there are plenty of ways to raise some money.

Perhaps you have a spare room that you can rent out? Or even rent out your garage or parking space when you don't use it (check out Parkatmyhouse.com for details)?

If you have a whole load of junk in your attic that you no longer need, why not look at selling it on an auction site like eBay?

For a brilliant round-up of simple ways to improve your financial position, have a read of Three Ways To Make Some Cash!

It's time for that extension!

There is another way to look at this situation. If your mortgage is larger than the value of your home, then the property has clearly fallen in value. So do something to make it more valuable!

Now this can be something small, like giving the place a lick of paint, or something a bit more significant such as adding an extension.

As with overpaying on your mortgage, every little helps.

Don't do anything!

A final piece of advice is simply to sit tight. House prices go up as well as down, and so long as you can afford the monthly repayments and are content to stay where you are, then hold on and chances are soon enough you will be able to move on.

Negative equity is a subject that attracts a level of hysteria way out of sync with its actual effects. If you are in negative equity, don't lose sleep over it.

You do have options.

More: Now's the time to buy property! | Fix your mortgage rate before it's too late!

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