Negative Equity - There is more than one option

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Alex Chinneck's (artist) upside down house. See London SE1 website
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Alex Chinneck's (artist) upside down house. See London SE1 website

Half a million people in the UK are in Negative Equity

When the debt bit on your house is bigger than the cash bit. You are said to be in negative equity which is when you owe more money to the bank than the house is worth.
Losses  are only realised when it is sold so this may not pose a problem if you can afford the mortgage and sit tight until the property market increases in value.
However if you need to sell then it becomes more of an issue because if your house is worth less than the loan outstanding on it, then you need to pay the bank the difference before someone can buy it.
Estate agents often fail to identify this when they speak to sellers and will list their homes on the market resulting in a lot of wasted time for everyone involved.
To find out if your house is in negative equity you need to look at your most recent mortgage statement for your property and any other loans you have against it. If there is more than one add them together.

e.g. £95,000 mortgage outstanding.

Then find out how much houses that are similar to yours have sold for in the local area. Zoopla or Rightmove can give you an estimate just google house price valuation  or my favourite who charge are Hometrack.
Make sure you compare like with like. Same number of bedrooms, same area, same type (detached/flat). To be more accurate you can pay for a valuation from a RICS surveyor or use an Estate Agent and ask for a price if you wanted it sold within the next 30 days.

e.g. your research finds £75,000 is the property value.

Then you need to subtract the property value from the mortgage.

£75,000 - £95,000 = -£20,000
(negative equity) note the minus sign.

If you end up with a minus figure you are in negative equity also known as an upside down loan.  So if you want to sell the house in our example above, you need to be able to pay the mortgage company £20,000.  If you have a positive figure your are in positive equity so you will have a surplus cash bit to put in your bank account.  Equity is another word for cash or credit.
If you had to sell your property  with an Estate Agent you would also incur selling fees which could push you into Negative Equity as the Agent must be paid.
We've established what Negative Equity is and that we are in it. What are our options?
  1. You could keep living there. Providing you can afford to pay the mortgage and bills then you can keep going as you are. Hopefully as time goes on the property market will pick up and the house value will rise to the price you paid for it.
  2. You could keep living there and rent out your spare room to a lodger - this can generate you an income of £4,250 tax free each year (google rent a room scheme) which you can pay off your mortgage shortfall with. If it generates more then you can use that too - providing you declare it to the tax man and subtract the tax. Tell the mortgage company your plans to rent the room out to a lodger and most won't charge you a fee or require a consent to let agreement.
  3. You rent it out. You could speak to your mortgage lender and ask for permission to let to allow you to rent it out, either as a whole house or as a house in multiple occupation (HMO)- as rooms - there is sometimes a fee for this. Then you can move out, rent out rooms in your house and convert the dining room into a bedroom. Then by moving 4 tenants in on a room by room basis earn a rental income that exceeds the mortgage - then with the surplus money pay down the shortfall. Some mortgage lenders don't let you rent out rooms  as an HMO so you need to check. Also you need to check laws in your area on this as there may be a licence fee in your area.
  4. You could speak to your mortgage lender and ask if the mortgage is portable which means the negative equity could be moved to your next house. You can sell the house and move the debt bit to your new one and pay it off at the same time.
  5. You could hand the keys back and allow an Asset Management company to sell the property and once sold bill you for the shortfall. This option although it may seem attractive stops you from getting the best price for your house as the company are only interested in selling it quickly. Also they charge fees and these costs can be significant especially as you must continue paying the mortgage, insurance etc whilst you wait for the property to be sold. Once the house is sold the shortfall is calculated and you must pay this or be taken to court where further fees are added. Remember if you choose to sell it instead, you can live in it whilst you sell it.
  6. You could help someone else get on the property ladder which is what I do as a Property Consultant. Mortgages are hard to get right now so your mortgage has a value to someone who can't get one. Examples of this could be self employed people with less than 3 years accounts. New immigrants. People without a deposit but with good paying jobs. They would move into the house, make monthly payments and once they can afford to, buy the house. These people may be willing to pay more for your house for the convenience of not having to pay a large deposit or that they don't need to pay the fees they would to a bank. Most people's greatest fear is making a mistake. This is not a DIY solution. Speak to someone with experience in this area before attempting this.
  7. You could identify added value to your home - perhaps a garden big enough to build a second house, sell separately or use it as a car park. Then approach property developers or other people interested in these options. You could rent out your garage or driveway for parking and use the cash generated to pay off the shortfall. If your house is large you could register it for use as a film set to generate more income to pay off the shortfall. Any extra income you can make can help to reduce the shortfall.
Whatever decision you take remember there are always multiple solutions to every problem and there are often solutions you hadn't even considered. Here are 7 of mine off the top of my head. Handing back the keys is not the only option and would be my last choice. Best of luck.



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