You want to make as much money as possible when you sell your house.
The price you sell for obviously has a significant impact on this. And so too does the amount left on your mortgage.
In some cases, though, you’ll fall into negative equity.
Read on to discover what this means, what causes it, and how to avoid it.
What is negative equity on a house?
Negative equity on a house means that the property’s value drops below the amount still left on the mortgage.
It usually appears when a housing market downturn causes house prices to go down.
In many cases, you’ll lose money on paper if you fall into negative equity. In fact, some people are in negative equity and don’t even know it.
However, if you want to sell your house or get a new mortgage during this period, you’ll actually lose money.
You will be responsible for making up the difference to your lender.
What causes negative equity on a house?
Housing markets
Changes in housing markets impact individual house prices.
This applies to national housing market declines caused by recessions, policies, etc.
It can also be cause dips in local property markets. Factors include:
- Large local companies closing down
- Local infrastructure problems
- Downturn in local investments
- Rise in crime rates.
And more.
Property issues
But it can also be self-inflicted.
For example, if you’ve made alterations that damage the property’s structure. Or you’ve failed to deal with a pest infestation (rat issues are a notable example!).
(There are many issues that you must declare when selling a house.)
How much of a loss you make depends on what people would buy your house for. It’s useful to get an independent valuation, but it’s useless unless someone pays this much.
New builds
Negative equity is commonly seen when someone buys a new build. These properties are sometimes sold for more than they’re worth.
Many new build owners have found their house’s value drop once they’ve bought it.
How to avoid negative equity?
Put down a relatively large deposit
The larger the deposit you put down, the less likely negative equity is to happen.
This is because you have more equity in the property. The house value would thus have to fall much further for it to become ‘negative equity’.
Focus on timing
Timing is also crucial on the housing market. You should buy a house if you feel certain that it’ll rise in value.
Get an expert’s opinion on this. And the timing of your sale is equally important.
If you wait until house prices go up, you can turn a losing situation into a winning one.
Negotiate hard
Negotiate hard when you first buy a property. And do the same when you sell it.
Every penny counts and can make the difference between avoiding or falling into negative equity.
Avoid interest-only deals
Some experts recommend that you avoid interest-only deals.
This doesn’t allow you to build up much equity in the property. You’re thus more vulnerable to negative equity.
What should I do if I fall into negative equity on a house?
You have a few key options in this position, which many experts could encourage you to consider. These include:
Continue to live there as normal
Continuing to live there is ideal if you aren’t planning on moving anyway. Over time, your property value will hopefully increase, and you’ll thus move out of negative equity.
Overpay your mortgage
Meanwhile, overpaying your mortgage allows you to build equity in your house more quickly. This can also speed up the timeframe for you to move out of negative equity.
Make changes that’ll increase your property’s value
This is by far the riskiest. You’ll need to ensure that your money spent on alteration gives a healthy return on investment (ROI).
If you don’t make a profit on these renovations, you could make the situation even worse.
Sell your house
You can sell your house in negative equity and make up the difference. Make sure you calculate what this will likely be, then save up for it.
Rent out your house
You can let out your home and rent somewhere less expensive. Just ensure you get permission from your lender to do this.
It can increase your income and thus help you build more home equity.
Contact support schemes
One other thing you can do is look for support schemes to pay your mortgage. Contact the Citizen’s Advice Bureau to find out what’s available.
Declare bankruptcy
In a worst-case scenario, you could be advised by a professional to declare bankruptcy.
Never do this without speaking to a qualified expert first. It should only be done as a last resort, when there’s no other choices.