Are you stuck in negative equity? Don't worry - you're not alone! Many homeowners face this challenge in today's property market. But what does this mean for your borrowing options? Let's explore!
Negative equity is created when your home is worth less than your mortgage. This can occur if the value of your property decreases after you’ve bought it.
Example:
Imagine Eliza bought a house for £200,000:
Two years later:
This creates negative equity: Eliza owes £175,000 on a house that's only worth £160,000.
If Eliza sold her house today for £160,000, she would still owe the bank £15,000 (£175,000 - £160,000) after the sale.
That £15,000 difference is the ‘negative equity’ - this means she owes more on her mortgage than her home is currently worth.
Good news! If you keep making your mortgage payments on time, negative equity won't hurt your credit score. Lenders still consider you a responsible borrower as long as you pay your bills when due.
Below are some common ways to borrow money, along with how they’re affected if you’re in negative equity.
You can still get a personal loan while in negative equity. Your credit history matters more than your home's value when applying for these loans.
Remember: Don't take on more debt than you can handle! Use a loan calculator to figure out your monthly payments before you apply.
Credit card companies don't care about your home's value either. You can qualify for credit cards if you meet the lender's requirements and have a good payment history.
Unfortunately, secured loans won't work if you're in negative equity. These loans need home equity as collateral - and negative equity means you don't have any.
Remortgaging becomes tricky with negative equity:
Selling a house in negative equity means you owe more money on your mortgage than your home is worth. When you sell, you'll need to pay the difference between your sale price and your remaining loan balance - the negative equity.
If you’re in this situation, you have a few options:
Many homeowners face this tough situation during housing market downturns, but with careful planning, you can find a path forward.
If you’re in negative equity, a few options you can consider that could help you get out of it include:
Once you escape negative equity, you'll have many more borrowing options available!
You may be able to use an unsecured loan (a personal loan) to clear your negative equity, but be mindful of making credit applications at the same time as applying for a mortgage. Too many in a short space of time could affect your ability to get your mortgage accepted.
Lenders tend to charge higher interest rates on unsecured loans compared to secured loans because they don't use your property as security. The good news is that with an unsecured loan, it keeps your new house safe if you struggle with payments.
Also remember that providers usually want you to pay back unsecured loans more quickly, which means your monthly payments will probably be bigger.
Negative equity is temporary. With regular payments and patience, your situation will improve. The property market changes over time, and home values generally increase in the long run.
Stay positive and stick to your payment schedule - better days are ahead!
Disclaimer: We make every effort to ensure content is correct when published. Information on this website doesn't constitute financial advice, and we aren't responsible for the content of any external sites.
Zubin is a personal finance writer with an extensive background in the finance sector, working across management and operational roles. He applies his experience in customer communication to his writing, with the aim of simplifying content to help people better understand their finances.
Sign up for tips on how to improve your credit score, offers and deals to help you save money, exclusive competitions and exciting products!
