Negative equity: what it really means
As a new report reveals that nearly one in six UK homes is in negative equity, Laura Starkey looks past the headlines at what this really means for mortgage borrowers.
If you're a homeowner, the downward march of house prices over the past year and a half may have caused you some sleepless nights.
Doubtless, the hype surrounding the fortunes of the property market has done little to quell any sense of panic you feel.
Last week, global ratings agency Fitch (which provides independent credit opinions, research and data) released a report which suggests a massive one in six "prime" UK mortgages has fallen into negative equity.
The statistic sparked headlines up and down the country – but what does negative equity really mean for you?
Fitch's findings
Fitch looked at the mortgage loans that had been packaged together by banks and sold on to investors during the recent economic boom.
It focussed particularly on "prime" mortgage loans (those to customers with good credit histories).
Fitch found that 15% of the prime mortgages it studied now have higher values than the homes they were secured on. In other words, almost one in six UK homes is now in negative equity.
Fitch also revealed that householders in some parts of the country are more likely to be in negative equity than those living elsewhere.
The SR1 postcode area in Sunderland is the UK's negative equity hotspot, according to Fitch. 28.1% of homes there are worth less than the outstanding mortgages held on them.
So, what is negative equity?
Defining negative equity is quite simple. If you are in negative equity, it means that your property is worth less than the amount you owe on your mortgage.
For example: a borrower with an outstanding mortgage of £100,000 and a home worth £90,000 would be in negative equity by £10,000.
What it means if you're moving or remortgaging
Being in negative equity may be a problem if you need to move house. This is because you won't have enough ‘cash' in the property to put down as a deposit on your next home.
Likewise, negative equity is likely to create difficulties for anyone looking to remortgage. Thanks to the credit crunch, most lenders now demand substantial deposits of at least 10% from borrowers.
With no equity to use as a deposit for a new mortgage deal – and in the absence of a high loan-to-value (LTV) mortgage, such as a 95% or 100% mortgage – you may have to stay on your lender's standard variable rate (SVR) when your current deal ends.
Anyone whose home is repossessed may face additional financial stress if they are in negative equity. If your lender cannot make back the amount you originally borrowed when they sell your property, they may come after you for any sum still outstanding.
Don't panic!
However, it is important not to panic at the mere mention of negative equity. If you're affected by it, this doesn't mean you will fall into mortgage arrears or that you're at risk of repossession.
In fact, provided you can afford your mortgage payments and do not need to move or remortgage, being in negative equity is unlikely to have any impact on you.
What's more, because the Bank of England base rate is currently at an all-time low, some lenders' SVRs are fairly competitive in price. This may soften the blow for homeowners who are in negative equity and unable to remortgage with another bank or building society.
What you can do
If you're already in negative equity and are worried about it, there are steps you can take to help ease your mind and improve the situation.
Overpay on your mortgage: If you can afford to, increasing your monthly mortgage repayments will help you build up the equity in your home more quickly.
Many lenders now allow overpayments up to a set yearly limit, but others will not allow them at all – so it's important to check with your bank or building society before deciding to overpay.
Even if your lender is usually strict on overpayments, you may find they take a more sympathetic view if you are in negative equity.
Improve your home: Alternatively, making improvements to your home could increase its value and help pull you out of negative equity.
However, it is crucial to plan and budget carefully for any work you intend to do. If you spend more on making the improvements than they are likely to add to the value of your property, you could end up out of pocket.
Shrinking equity stakes
If you still have some equity in your home and are currently sitting on your lender's SVR, you might want to consider remortgaging sooner rather than later.
Similarly, if you're expecting to come off your current mortgage deal in the near future, it may be worth trying to book an attractive remortgage today. Many lenders now allow borrowers to reserve mortgages up to six months in advance.
While it's impossible to predict what will happen to house prices over the next few months, it is worth remembering that the further they decline, the less equity you will have in your home.
Should your equity stake shrink too far, you will find it more difficult to get a competitive new mortgage deal when you need one.
Keep calm and carry on
Whatever your situation, it's important to try and relax. As Fitch's figures show, millions of people have been affected by the property downturn. If you're in negative equity, you're far from alone.
Being in negative equity isn't an ideal situation, but it doesn't necessarily mean your dream of home ownership has become a nightmare.
In the long term, I think property prices will recover – it's just a matter of waiting for the upturn to arrive.
If you can keep calm and carry on as normal until then, you should find negative equity is far less scary than it seems.
**Articles featured on BeatThatQuote.com are for information purposes only and reflect the views of individual writers. Articles are not, and should not be considered as, financial advice. BeatThatQuote.com strongly encourages our readers not to rely solely on information contained within this article/our website, but to conduct their own research and seek independent advice about the financial products they purchase.**
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