A guide to negative equity and how to overcome the problems associated with negative equity, from remortgaging with a 125% mortgage to home improvements

Economic downturn-related property price declines have led to an increase in property owners experiencing a loss of equity. Despite the undesirability of negative equity, the problem will not immediately affect those planning to stay in a property for the longer term. However, negative equity may present a more significant issue if considering moving, remortgaging, or taking out a second mortgage.

Property Investment: What is Negative Equity?

In the first instance, negative equity is simply that an individual has a greater level of outstanding finance on a mortgage than the property’s value against which the mortgage is secured.

For example, if an individual purchased as property for £100,000 with a £25,000 deposit and thus borrowed £75,000, then the individual is said to have positive equity of £25,000. It is market value less the outstanding balance of the mortgage.

However, if the property were a decline in value to a market value of £74,000, then the homeowner would then experience negative equity of £1,000 or the market value (£74,000) less the outstanding mortgage balance of £75,000.

Property Investments: The Problem of Negative Equity

In essence, negative equity means that if one were to sell a property, the money raised from its sale would not cover the amount owed to the mortgage provider. If an individual is not looking to make any immediate changes to property arrangements, this does not create a problem.

However, suppose individual wishes to move houses or sell the current property. In that case, negative equity will mean that the individual must find a way to fund the shortfall to avoid remaining trapped in the existing property. There are numerous ways of financing the shortfall:

• Time – For many, negative equity is simply a product of buying a property at the height of the property cycle. In many cases, merely spending a few more years on the current property and waiting for property prices to increase again may present an automatic solution.
• Home Improvements – One way to tackle negative equity is to increase the property’s value to fund the shortfall between the mortgage’s outstanding balance and the market value. One way of doing this is to invest in a program of home improvements to drive up the property’s value.
• Mortgage Products – Another option for those suffering from negative equity but still wishing to move is to consider taking on additional debt to fund the shortfall. Products such as the 125% mortgage offer those suffering from negative equity one option to fund the shortfall. However, such remortgaging options can be expensive, and the borrower needs to consider whether or not they can afford the additional repayments.

In summary, negative equity is a scenario where an individual’s outstanding mortgage on a property is greater than that of the value of the property itself. Whilst negative equity is an undesirable condition, the scenario in itself does not present any immediate financial dangers. However, negative equity can make the prospect of moving houses or remortgaging a difficult one.