What Does Negative Equity Means

What Does Negative Equity Mean? A Basic Guide!

Negative equity implies that the amount of your property is below the amount you possess on your mortgage. Even though negative equity is not an issue itself, it can become troublesome in case you are trying to sell your property or remortgage. Therefore, this blog will let you know what does negative equity mean and what are the problems linked with it. So, let’s start!

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What Does Negative Equity Mean?

If the cost of a property is below then the cost of your mortgage borrowed on it, then the property is in negative equity. The falling prices of the property are the main reason for negative equity.

For instance, in case you purchase a property for £160,000, the amount you possess on your mortgage is £130,000. Then, you will be in negative equity if now the worth of the property is £90,000. However, if now the value of your property is £140,000 then, you will not be in negative equity.

Within the United Kingdom, it is estimated that approximately half a million properties are in negative equity.

 

How to Know If You are in Negative Equity?

First, look over the statement of your mortgage or contact your lender to know how much you possess now. Then, ask a local estate agent to evaluate your property or appoint a surveyor for it. You are in negative equity if your property’s value is below then what you possess.

 

Is There Any Need to Worry About a Negative Equity?

It all depends on your ongoing situation and finances. You don’t have to worry about negative equity in case you just have bought your property (first-time buyer) with no issues of making repayments of your mortgage. The problem arises when you need to sell your property.

Let’s explore those problems!

 

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Problems that Arise with Negative Equity

Negative equity implies selling your property for less than the amount of the mortgage you borrowed to purchase it.

If you are willing to sell out your property, then negative equity is an immediate problem. You might find it hard to sell the property except when you have savings that can be utilised in order to pay back the difference between the amount of your property and the mortgage.

It can also be a problem if you are willing to remortgage to save your money by finding a suitable deal. When the existing mortgage of a person ends, many lenders do not allow persons with negative equity to switch to a new one. Instead, they will be switched to the lender’s SVR (standard variable rate).

 

Selling Property If You are in Negative Equity

How simple it is to sell property is based on the following factors:

  • Worth of the property you are willing to sell
  • The value of negative equity you have
  • In case you are updated with your current mortgage
  • The amount of deposit you can raise for the new property

First, contact your lender to see what assistance they can provide you. A negative equity mortgage is offered by few lenders. You can transfer your negative equity to your new property with this. But still, you’ll have to pay a deposit.

 

Pros and Cons of Negative Equity Mortgages

The following infographics will show you the pros and cons of it.

Pros and cons of negative equity

 

How to Avoid Negative Equity?

The following are the points that could help you to avoid negative equity.

  • Get an idea of the price by speaking to the professionals to know whether you are paying the property’s market price.
  • Buy the property at the right time because the value of the same property might change depending on when you buy it.
  • Pay a large deposit 
  • Avoid interest-only deals

 

Conclusion

Now that you understand what does negative equity means. We will conclude our blog by saying when property prices fall you can be in a negative equity situation. It might be challenging to deal with it when selling your property or applying for a remortgage. However, there are several strategies to avoid negative equity, but seeking financial counsel from a professional is more recommendable.

 

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Disclaimer: This blog is intended for general information on what does negative equity means.

 

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