Negative equity

You are in negative equity if your property is worth less than the amount you still owe to your mortgage lender or any other lenders who have given you a secured loan. It may be difficult to sell your home or to get credit.

Causes of negative equity

Equity is the difference between the value of your home and the amount you borrowed to buy it.

Negative equity can happen when property prices have fallen since you bought your home.

For example, if you got a £75,000 mortgage to buy a home worth £100,000, you have £25,000 in equity. If property prices fall and the value of your home drops to £50,000, you would probably have £25,000 in negative equity.

Negative equity can also be caused when your outstanding mortgage and your mortgage arrears are more than the current value of your home.

Risk of negative equity

You are more at risk of negative equity if you have:

  • fallen behind on your mortgage payments
  • borrowed a large proportion of the property's value
  • increased the size of your mortgage when property values were high
  • taken out other loans using your home as collateral
  • a mortgage with high interest rates

Get advice immediately if you are worried that you could lose your home.

Selling your home

You could still end up with a large debt to your lender if you have negative equity and you sell your home.

The money from the sale is unlikely to cover the cost of your mortgage, but you must pay back everything you originally borrowed.

Your lender (and/or other creditors) can take legal action against you even after your home has been sold. If you are in this situation, it is likely to affect your credit rating. You probably won't be able to get a new mortgage with a different lender or take out any other loans using your home as collateral.

You can sell your home in the normal way if you have enough savings (or other assets) to pay off the negative equity and the costs involved in selling. If you don't, you should get advice before you make a decision. If you can, it may be better to wait until property prices rise and your home increases in value.

If you claim means-tested benefits, the money you get from the sale is counted as capital and your benefits will probably be reduced.

Get permission from your lender

You normally need your lender's permission if you want to sell.

If you have used your home as collateral for any other loans, you may need permission from whoever provided those loans as well. It may be easier to get this if you have realistic plans to pay off everything you owe. For example, you may be willing to sell personal belongings or a car to clear your debts.

Get independent advice if you can't get permission to sell. Some lenders have developed schemes to help people who are stuck in negative equity. An adviser may be able to help you to negotiate. It may be possible to:

  • argue that selling privately will allow you to pay off your debts more quickly
  • convince your lender to let you keep the same mortgage but transfer it to a new property.

Some lenders may offer you a bigger mortgage to allow you to move to a new property and pay off the negative equity. However, this would increase your debts, and probably means you have to pay higher interest rates and/or arrangement fees.

Get independent financial advice before you decide. Use the FSA register to find a financial adviser.

Mortgage arrears and repossession

Your lender can't repossess your home just because you are in negative equity, but there's a risk that it may try to do so if you fall behind with your mortgage payments. However, repossession doesn't happen automatically.

Your lender may let you stay in your home and not sell it if you can come to an agreement about how you can pay off the arrears.

Get advice immediately if you are threatened with repossession. It may be possible to negotiate with your lender.

Use Shelter's directory to find a local adviser.

If your lender sells the property

You should only allow your lender to sell your home as a last resort.

There is usually a better option, so get advice before you decide to do so. If your home is repossessed, your lender is unlikely to get as high a price for it as you would if you sold it privately (or through an estate agent). This is because many lenders sell repossessed properties at auction. You are also still responsible for your monthly payments until the sale is completed.

Selling may take a long time. The amount you owe could increase considerably. Unless you can stay with friends or family for free, you also have to pay rent when you move somewhere else.

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