With Covid-19 halting property sales and causing concern that a recession is on the way, it’s perhaps not surprising that house prices have fallen. You might have heard of negative equity and may be worried about what it means for you. We take a closer look, but in most cases, it’s not something homeowners will need to worry about.
According to Nationwide, UK house prices were 0.1% lower in June than the same month a year ago. It’s the first annual fall since December 2012, when the market was still struggling in the wake of the financial crisis. Further highlighting the impact lockdown had, property values were found to have dropped by 1.4% compared to May. A typical home is now worth £216,403.
While the fall in value currently seen is relatively small, the housing market is still uncertain and a further reduction in value could be around the corner.
It’s never pleasant to see the value of your home fall, after all, it’s likely to be the largest asset you own. However, for the vast majority of homeowners, it shouldn’t be too much of a concern. A look at the historic prices of homes shows you that they do recover after falls. Take a look at the 2008 financial crisis, for example. Amid the financial crisis, property fell in value by 20% in just 16 months as repossessions soared. But they did recover eventually.
For most homeowners, it means they can sit back and wait, confident that house prices will rise again, even if a short-term blip means they fall. Despite the long-term outlook, negative equity may still be a concern for some homeowners.
What is negative equity?
Negative equity is where the total borrowing secured against your home is greater than its value. For instance, if your outstanding mortgage is £200,000 but your home is now only worth £180,000.
Before the credit crunch, negative equity was common as mortgage lenders would lend more than the property’s value from the outset in some cases. Mortgages of 110% were not uncommon. However, in the last decade, lending criteria has become a lot more risk-averse and you’ve typically needed a minimum deposit of 5% to secure a mortgage.
As a result, most homeowners will only experience negative equity if house prices fall by a significant amount. As you build up equity when making repayments, it’s typically, first-time buyers with a small deposit that are affected by negative equity.
So, if house prices were to fall sharply in the coming months and negative equity was an issue, what would it mean for you?
First, your regular mortgage repayments wouldn’t be affected. You’d need to keep making these at the level agreed, any mortgage deal that has been agreed would remain in place. How it would affect you beyond that will depend on what your plans are:
1. You don’t plan to remortgage or move
If your current mortgage deal isn’t coming to an end and you have no plans to move, negative equity can be frustrating, but it shouldn’t have an impact on your plans. Sitting tight and remembering that house prices have historically climbed can provide peace of mind.
2. You want to secure a new mortgage deal
Negative equity can make remortgaging more of a challenge. This is because lenders won’t want to lend you more than the total value of your home. As a result, you could struggle to find a new deal.
This could affect how much you pay out each month. When a mortgage deal ends, you’ll usually be moved on to your lender’s Standard Variable Rate (SVR) which isn’t typically competitive. As a result, you can be ‘trapped’ paying a higher rate of interest.
3. You plan to move
Again, if you had planned to sell your home but find yourself in negative equity, it can affect your plans.
When you sell your home, your lender will want the full amount owed to be repaid. If there’s a gap between this and the price you can sell your home for, you’ll need to bridge this. For some, this will mean moving home isn’t possible while in negative equity.
How to get out of negative equity
If negative equity could be an issue for you, there are some steps you can take.
First, if you’re in a position to do so, making mortgage overpayments can help. This will increase the amount of equity you own in the property, giving you a greater buffer if house prices fall. You can either increase your monthly mortgage repayments or make a lump sum payment. Be sure to check the terms of your mortgage first, some lenders will charge you for making overpayments.
Second, home improvements could increase the value of your home to limit negative equity. In some cases, relatively inexpensive tasks can add real value to property prices. However, you need to carefully assess the initial cost with how much it is likely to inflate your home’s value by.
Finally, putting plans on hold is an option. Staying put for a while can give house prices a chance to recover if they experience a dip, hopefully taking you out of negative equity too.
If you’d like advice about your property and future plans, please get in touch. We can help you understand what negative equity means for you and the options available.
Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.