Everything You Need to Know About Selling a House with Negative Equity

It’s not an easy situation if you’re trapped in negative equity but need to move. However, there are a number of options you can choose to get around the problem and sell your house. 

In this article we explain everything you need to know about selling a house in negative equity, as well as tips on how to get out of negative equity.  

What is Negative Equity?

Negative equity is when a property is worth less than the mortgage on it. In other words, it is when the value of a home falls below the remaining amount owed on the mortgage. Falling property prices, which are hallmarks of an economic downturn, typically lead to negative equity. 

How Negative Equity Works

Let’s take a look at some examples to highlight negative equity. 

For example, let’s say you bought a property for £160,000 and took out a mortgage of £140,000. After three years, you have paid off £15,000 of that mortgage. You decide to get your house revalued and it is now valued at £110,000, and you still have £125,000 of your mortgage left to pay. In this situation, you would be in negative equity by £15,000.  

Let’s look at another example. Let’s say you bought a property for £160,000 and took out a mortgage of £130,000 which you have started to pay back over a couple of years. You decide to get your house revalued, and discover it is now valued at £140,000. In this situation, you would not be in negative equity, as the amount remaining to pay on the mortgage is below the value of the property. 

If you are not sure whether you are in negative equity, it is a good idea to contact your mortgage lender who will be able to tell you how much you currently owe. Then you can ask your estate agent to value your home. If the value of the property is less than what you currently owe, you are in negative equity. 

Assessing the Impact of Negative Equity

Typically, buying a house is considered a safe, long-term investment. Generally, this is true, and property prices have risen considerably over the last 14 years, as data from Statista shows.   

However, it is estimated that up to half a million properties in the UK have negative equity. Unfortunately, if you are in negative equity, it will be more difficult to sell your property. This is because mortgage lenders are reluctant to arrange a sale if the return on the sale is likely to be less than the outstanding mortgage. 

Can I Sell My House in Negative Equity?

It is possible to sell your house in negative equity, but only if your mortgage lender agrees to it. Ultimately, selling a house in negative equity means that you will be in breach of your mortgage terms. This is why you need to discuss the sale with your mortgage lender and get permission from them to proceed with the selling process. 

If you are in a situation where you need to sell your house, you should speak to your mortgage lender. Communicate openly and honestly with them to try to reach an agreement. They are more likely to agree to a house sale if your home might otherwise be repossessed.  

If you want to go ahead with the sale and your lender agrees to you selling the property, you will need to make repayments to account for the shortfall. It is imperative that you make these payments as agreed, otherwise, you could be taken to court.  

If your mortgage lender doesn’t accept your request to sell, you won’t be able to buy a new home and take your mortgage with you. 

The Importance of Speaking to Your Mortgage Lender

If you want to sell your house in negative equity, you will need to have a discussion with your mortgage lender as you won’t be able to sell the property at a lower price than the money you owe. 

That said, some building societies and banks provide specialised mortgage products for those in negative equity; these allow you to transfer your mortgage debt onto the new house. But be aware that this will mean increasing your existing payments to make up for the shortfall. This option would certainly allow you to move, but it would mean either paying more each month or increasing the term of your mortgage, meaning you’d pay more in the long-run. 

Having a discussion with your mortgage lender will give you a clear idea of how much of your mortgage needs to be paid and whether you can move your current mortgage to another property, re-mortgage to a different deal or consider other financing options. 

How to Avoid Falling Into Negative Equity

Whist nobody can accurately predict the exact behaviour of the housing market, or the direction of the wider economy, there are some steps you can take to help avoid falling into negative equity.  

Put Down a Larger Deposit 

The most effective way of avoiding negative equity is through putting down a large deposit when you buy a house. The basic rule of thumb here is to put down as much deposit on the property as you can reasonably afford.  

It is always better to contribute as much as you can to your deposit, even if this means waiting longer than you wanted to buy a house. The more money you put down on a deposit, the less money you will need to borrow, which means a lower mortgage. Even if the value of the property decreases, a lower mortgage will help you to avoid falling into negative equity on your home.  

Consider the Local Area 

Also, it is important to consider whether the value of property is decreasing in the area where you plan to buy. This can give you an indication of whether you might fall into negative equity in the future. Naturally, looking at other property prices in the area will also give you an insight into whether you are paying a reasonable price for the property.  

Choose a Comfortable Mortgage 

When choosing your mortgage, opt for a loan that allows you to comfortably manage your monthly payments. You ought to avoid stretching your budget to the limit, as this can increase the risk of negative equity. 

Make More Prepayments 

If possible, make extra payments towards your mortgage lender. This will help to reduce the outstanding mortgage balance and build equity quicker. 

How Can I Get Out of Negative Equity?

If there is one constant with the housing market, it is that it’s constantly changing. In time, changes in the market could mean that the value of your property increases (and more of your mortgage will be paid off), so you could get out of a negative equity situation sooner than you think. 

If you still keen to sell, the following points can all help you to get out of negative equity: 

Use savings to pay off more of the mortgage: As mentioned above, you can use savings to pay off more of the mortgage so that the value of the property is more than the mortgage. This means you will be out of negative equity 

Consider renting out your property: Renting out your property can be a great way to reduce negative equity. Remember that you will need to get consent from your mortgage lender to do this. You could then find a lower priced area and become a tenant, which will give you the opportunity to save some money to then reduce your negative equity. Do bear in mind that mortgages for landlords are likely to incur additional costs in comparison to owner-occupier mortgages if you do choose to go down this route 

Undertake home improvements: You can make some improvements to your home to raise its value. This will lead to a reduction in the amount of negative equity  

Monitor market trends and wait it out: Stay informed about the housing market’s performance. Keep track of local economic indicators, interest rate changes, and other factors that could impact property values  

Consult Professionals: Seek advice from real estate agents, financial advisors, and mortgage professionals. Their expertise can guide you in making informed decisions.  

Now let’s go into some more detail on some of the points above. 

Pay Off Your Loan Using Other Savings

You can use savings to pay off some of your existing mortgage before you sell. This could potentially bring you out of negative equity if you have enough saved to make the cost of the loan match the value of the property. 

This might seem like a relatively simple solution, but before you put all your savings into paying off your mortgage, make sure it makes sense to your financial situation. A few important points to consider are: 

• Are you likely to need your savings for other important purchases in the future? 
• How much interest would you earn on your savings if you didn’t use them to pay off your mortgage? 
• Will you incur any interest penalties for withdrawing your savings? 
• Will there be a charge for paying off a lump sum of your mortgage? This can be checked with your mortgage lender. 

Take Out a Loan to Borrow the Difference

Whether you decide to take out a loan or not will depend on the difference in the value of your home and the amount of money outstanding on your mortgage. If you do decide to follow this route, make sure you can manage the loan repayments and also ensure you get the best possible rate.  

It’s worth remembering that taking out an unsecured loan will increase your debts and is likely to cost more than what you owe on your mortgage. You can also speak to our expert financial services partner Life FS to assist you with this. 

Raise Your Home’s Value by Making Improvements

Making improvements to your property before putting it on the market can increase its value, therefore reducing your amount of negative equity. 

It’s possible to boost the value of your property without spending too much money. Have a look at similar houses that are being sold in your area to see what sort of features they have to attract potential buyers, and work out how much these changes would cost to make to your home. There may well be some enhancements that you can make to your property that will add value without breaking the bank. Improving kerb appeal can add a surprising amount of value to your property.  

Find out more about how to add value to your home on a budget. Or, find out more about the best ways to add value to your home.  

Alternatively, we have a team of refurbishing experts who can assist you with this. Our team will advise on what are the best options to improve the value of your property based on your individual circumstances, and can manage the process for you. 

Rent Out Your Property

If you need to move sooner rather than later but are unable to sell your property, renting out your home could be an option to think about. 

In this circumstance, you would still own your home and would repay your mortgage through rental income. In the meantime, you would be renting elsewhere until your property is freed from negative equity, leaving you ready to sell. 

You would need to get consent to do this, as most mortgages are based on an agreement that only you and your family will be living in the property. To rent your home out, you will need to switch to a buy-to-let mortgage, which can potentially increase your repayments and interest rate. 

It’s also worth remembering that you might need to carry out work to prepare your property for rent, and think about how you would manage your tenants. One stress-free way to do this is to use an estate agent; find out how Chancellors can help you manage your rental property. 

Stay Put and Try to Stick it Out

If you don’t need to move as soon as possible, it might be worth staying put and waiting for the market to improve. This tends to be the cheapest option if you’re in negative equity, as you’ll gradually reduce the size of your mortgage each month as you pay it off whilst the property value increases. 

If you want to move sooner rather than later, you could speed things up by making overpayments on your mortgage, but make sure you won’t be charged penalties for doing so before you decide on this plan. 

Typically, most mortgages will allow you to overpay by around 10% without penalty. However, this is not universal, so be sure to check with your lender before making a decision. 

It’s important to remember that, due to constant changes in the market, negative equity isn’t necessarily a permanent condition. Any of the above methods can help you sell your home if you are in negative equity. 

Are You Looking to Sell Your Property in Negative Equity?

If you are looking to sell your property and your are in negative equity, we understand that it is both worrying and frustrating. Here at Chancellors, we can help you to sell your property, even if you are in negative equity. Our experienced estate agents understand the realities of this situation for sellers, and are here to provide full support and guidance throughout the selling process. Contact us today for more information, or visit our branches page to find your nearest branch.  

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