In June of this year, the Bank of England estimated that 1.1 million homeowners were facing a situation of negative equity. – A situation where the outstanding mortgage is greater than the value of the house. So many face negative equity because of a rapid fall in house prices and the fact many mortgages were sold in the boom times with a low deposit ratio. The situation of negative equity is worse amongst sub prime mortgages, where 1 in 6 mortgages face negative equity. The Northern Rock has the largest % of customers with negative equity. According to Fitch 32% of mortgages in Northern Rock’s Granite account are in negative equity.

If you need to move but are stuck with negative equity what can you do?

What is Negative Equity?

Negative equity is the paper loss you may have on a property that was bought for one amount but is now worth less than you paid. If you have no mortgage the paper loss is stood by you when you sell.

If the property is mortgaged for more than the house is now worth then the negative equity trap is a concern to the mortgage company as the loss would mean the mortgage isn’t covered by the property value.

Example you pay £200,000 for a house 3 years ago and have a £180,000 mortgage. The property is now valued at £170,000 due to the slump in values. The value is down £30,000 and you have a loss of £20,000 and there is a further £10,000 negative equity between the mortgage value and the realisable value.

The Effect of Negative Equity

It is hard to move home when you have negative equity.

Usually the mortgage company won’t allow the house to be sold unless you have enough spare capital to make up the £10,000 shortfall (the difference between the selling price and the outstanding mortgage).

Crystallising negative equity can damage your credit score.

Negative Equity Mortgage

Coventry Building Society and Nationwide have created a ‘negative equity mortgage’ that allows existing customer to carry forward negative equity if they move house. Up to 25% of the old home value, same or lower total loan, and not trading up are restrictions from Coventry but the scheme seems to be a good one.

Other lenders should and probably will follow suit so it is worth asking your lender if you need to move.

Do not become trapped by negative equity. If you have no new capital to make up the shortfall you may be able to get a family member to guarantee the difference. It may be appropriate to take an unsecured loan to fund the gap but beware the rates charged. Failing all the routes you know pressurise you lender to follow the Coventry Building Society and allow you to carry part of the gap forward to your new property.

Related

Remortgaging with negative equity

Mortgage Equity withdrawal

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