Being stuck in negative equity when you need to sell your home puts you in a difficult situation - but there are ways to get around the problem. We explain your options.
Negative equity, while not a cause for panic in itself can make things a lot more complicated if you do need to move.
With an uncertain financial climate and a slump in house prices many people have been left with a mortgage greater than the value of their home.
This isn't too much of an issue if you can afford to keep up with your mortgage repayments and are able to sit out the slump. However, if you do need to move house being in negative equity makes things a lot more complicated.
Read our guide What Does Negative Equity Mean for Me? if you are unsure whether you are in negative equity or want more information on its wider implications.
However, if you are in negative equity and need to move home, here are your options:
The first option you should consider when you’re looking to move out of negative equity is whether you could use any savings you have to reduce the amount you owe.
It's important to look at whether this course of action makes financial sense before pressing ahead.
Firstly will you be penalised by your mortgage provider for paying off a lump sum on your mortgage? If this is the case will the fact that you'll be able to move home worth it?
The amount of interest you earn and any interest penalties for withdrawing your savings should also be take in to consideration when you are making your decision.
As should the fact that using your savings will also mean that you won’t have ready access to the money if you need it further down the line. You should think about whether the money has been earmarked for anything in particular – to pay off a more expensive debt or in case of an emergency.
For more guidance on using saving to pay off your mortgage take a look at our article Should I Use My Savings to Pay Off My Mortgage?
Staying put and waiting it out is often the best, and cheapest option if you find yourself in negative equity.
As long as you continue to pay your mortgage each month you don’t need to worry about repossession and will begin to climb out of negative equity as you reduce the size of your mortgage. This will only be an option if you don't need to move, of course.
To speed things up and enable you to move sooner, you could start making overpayments on your mortgage - although you should only consider this option if you won’t be charged penalties for doing so and can afford the extra outlay.
As a rough guide most mortgages will allow you to overpay by up to approximately 10% without any penalty, however you should check with your lender as this is not universal.
You could look at boosting your income so you can pay off your mortgage quicker by renting out a room to a lodger. Alternatively, you could free up extra money to put towards your mortgage by reducing your outgoings - take our 1 hour Mini Money Makeover to see if there are any areas in which you can easily save.
There is also a good chance that that house prices will recover at some point in the future, increasing the equity you hold in the property.
However, whether house prices will go up and solve your problem in 1 or 5 years is difficult to judge, meaning you could be left waiting a lot longer than you’d need before you’re able to sell.
If you find that the amount you’re likely to raise through the sale of your property is falling just short of what you’d need to break even on your mortgage then there are several ways you can increase the value of your home without spending a small fortune.
Before you do any DIY you should look at similar properties on the market in your area to see what they offer potential buyers and at what price. Perhaps even arrange a few viewings so you get to see how they compare to your home on the inside and out.
You may find that there are some enhancements that you can incorporate into your own home to add value at an acceptable cost.
If you’re stuck for ideas then you can always contact a local estate agent to ask for suggestions on how to boost your property value.
Take a look at our guide 9 Easy Ways to Add Value to Your Property for more inspiration.
If you can’t sell and have no option but to move, renting out your home may be an option worth considering.
This would mean you’ll continue to own your home and repay your mortgage using rental income whilst you rent somewhere else until your home comes out of negative equity and you’re able to sell.
Whether this is financially viable will depend on your circumstances. You will benefit from a rental income but whether it will be sufficient to cover your mortgage payments depends on the local rental market.
However before you consider this as an option you will need to contact your mortgage provider. Most mortgages are based on the agreement that only you and your family will be living in the property.
In order to rent it out to a third party you have to change to a buy-to let mortgage which could push up your interest rate and repayments. Doing this will also break the terms of any fixed mortgage deal you currently hold meaning you could incur other charges.
You would also need to factor in any work you would need to do to prepare it for rent and how you would manage the property and your new tenants.
Read our article I Want to Rent Out My House - What Do I Need to Do? to find out more about your options.
Speaking to your mortgage provider about your options is a good idea regardless of which course of action you are considering – it will give you a clear idea how much you owe and if you can move the mortgage to another property.
When faced with negative equity your options will largely be restricted by how flexible your mortgage provider is when it comes to letting you transfer your mortgage to a new property, re-mortgage to a different deal, or accept alternate finance options.
Some banks and building societies offer specialised mortgage products for people who are trapped in negative equity whereby you transfer the outstanding debt to the mortgage on the new property. This means you would be increasing the size of your existing mortgage in order to make up the shortfall.
However, while this would allow you to move it will set you back where your mortgage is concerned, it’s likely you’ll either have to start paying more each month or extend your mortgage term.
Either way you’ll end up paying more in the long run so it's important you carefully weigh up your options in terms of cost in both the long and short term.
Depending on the difference in value between your home and outstanding mortgage you could look into borrowing the money you need to clear the short fall on your mortgage and buy yourself out.
Ideally, you should look to see whether friends or family are able to help you to raise the funds - although this option is of course dependant on knowing someone who is willing and able to lend you the money to clear the difference.
However, if you are stuck you could always consider taking out an unsecured loan as a final option.
If you decide to investigate using a loan to make up the difference you should ensure you can manage the repayments and, of course, get the best rate possible.
Remember taking out an unsecured loan will increase your debts, is likely to be more expensive than the borrowing on your mortgage and should only be considered if you’re desperate to move.
If you’ve reached the point where you are struggling to meet your mortgage repayments but are stuck in negative equity, selling your home may be your final option.
It's possible that your mortgage lender would be willing to accept the amount you'd be able to raise through the sale of your property as settlement on your mortgage - providing it's more than they'd receive if they went down the repossession route.
Selling your home knowing that you won’t get enough cash to clear your mortgage will be breaking the terms of your mortgage, will be costly and is really only an option if you're in severe financial difficulty.
The Citizens Advice Bureau has information about the implications of doing this and will be able to give guidance if you contact them directly.
If you are even considering this option then you should seek advice from a debt charity such as StepChange or the Shelter housing charity and speak to your lender before agreeing any sale as they will need to agree before you go ahead.
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