Negative equity has been a problem for homeowners for many years but since the crash in 2008, it has become more of an issue. Families have split up because of it and many people have become ill due to the stress it causes. But what actually is it? And are there any ways out of it?
What is Negative Equity?
It is actually very simple and a lot of people are already aware of exactly what it is. Basically, if someone borrows £200,000 to buy a house and the value of the house drops below the amount they borrowed to buy it they are in negative equity. It means they owe more money than they can recoup from selling the property. Property prices always go up and down and often negative equity can be very short lived. However, it can be a very big issue if a property was bought in a boom period or in a period record property prices. These periods are not always sustainable and the resultant crash in value can be devastating.
Other things that can cause negative equity are issues with the local area. Regular flooding can cause the local area values to drop as people feel buying in a flood risk area is too risky. School closures, crime figures, high street closures and a wide variety of things can cause a drop in value and the resulting negative equity situation for some homeowners.
Why is Negative Equity Bad?
It is bad for a number of reasons but the main one is that if someone wants to move they basically can’t. If they sell the house for less than they owe they need to find the money to pay off the rest of the mortgage themselves. Now, of course, you won the lottery then this would not be an issue but in most cases, people borrow because they are not cash rich so are unlikely to have this month.
It is also very bad if the lender chooses to call in the loan for some reason. If they called it in when the property was worth more than the loan amount then it would not be an issue but if a property is worth a lot less once again the owner has to find the money elsewhere.
Is Negative Equity Always Bad?
Well, it is never a good thing but if the owners are planning on staying in the house for many years it doesn’t have to be a big problem. Given enough time the value may well come back up again. But either way, as long as the owner doesn’t want to move and can keep up with mortgage payments there doesn’t really need to be any stress.
What Can You Do If You’re in Negative Equity?
There are really only 3 things that can be done. The first is to simply sit it out. Just wait and see if the price rises again. This is often the most sensible thing to do. However, it does obviously involve you staying in the property and in some cases, this is simply not an option.
Another option is to find a local home buying service. While they won’t give you the money to clear the debt they are able to offer a very fast sale and often this is worth doing if you feel the price could drop further. You can then consider taking out a loan to cover the rest of the debt and then start again…or perhaps simply rent in future. Look for local companies with good local reviews as this industry can be a little cutthroat. A reputable company will give you a good price and will take the time to make sure you are well looked after.
The third option is to try and sell your home through an estate agent. This is often expensive and carries with it the issue of having to have viewing and maybe even repairing and spending money on the house to get it to a saleable standard. Spending money is not a good idea in this situation and a home buyer will not require that kind of input. The other potential issue around a traditional sale is the time it could take. You may find it won’t sell for months or more than a year and in that time prices could have fallen further.
In some situations, owners may be able to change the mortgage to a buy to let and rent the house out as a way to recoup some of the lost value. This is rare but something worth exploring if you can afford to look at renting a smaller home elsewhere.
How to Avoid Negative Equity
It is impossible to predict when property prices are going to fall but research can be a great way to really understand the local area. Look for price trends on sites like Zoopla. You can view the average prices over many years and this should help understand if there have been any big changes. Look at flooding, you could even get a flood risk assessment done before you buy to make sure the property is not in danger. By doing this you are helping protect yourself against a potential price crash due to flooding. Look at local crime stats and look into any big developments or even things like fracking. You need to look for anything that could look bad and less appealing about the area that could be on the horizon. If you find anything then seriously consider the purchase and perhaps look around for other areas or push for a lower sale price.
If you are in this situation look for help and advice from groups and websites that are able to provide such things without bias. There are ways out of it and it may not be permanent. It is key to try to avoid stress and upset and keep positive!