What is the Impact of Negative Equity on Your Mortgage?

What is the Impact of Negative Equity on Your Mortgage?

Your home may be repossessed if you do not keep up with repayments on your mortgage

Are you a young homebuyer? Are you thinking about what the current economic climate means for your mortgage and whether you might slip into negative equity? Or perhaps you’ve owned a home for many years. Regardless of your situation, at Hansford Bell our aim is to provide you with clarity on this complex topic.

We are Chartered Financial Planners based in Tavistock with a long-standing client base. Our financial planning services takes your life goals as the starting point. Together we plot your course to financial fulfilment and facilitate any changes to help you get there.

What is Negative Equity?

Whether you’ve had a mortgage before or considering a new one, you may have come across the term ‘negative equity.’

If you haven’t heard of it, ‘negative equity’ means the value of your property has fallen below the outstanding balance on the mortgage. In other words, you owe more on your mortgage than what your property is currently worth.

Negative equity often results from borrowing a large amount for your property. As well as that, it’ll result from external market forces causing a decline in property prices.

What are the Disadvantages of having Negative Equity on a House?

Given the current global situation, financial stress is at an all-time high for many people in the UK. Particularly in the mortgage sector. We want to help you navigate these times by taking an honest look at what negative equity could mean for you.

Let’s take a closer look at the key financial disadvantages of having negative equity on your property:

Limited Selling Options

What does this mean for you?

Imagine your home equity is like a ladder, with each rung leading to an increase in your ownership of the property.

Negative equity is like an anchor tied to your waist making it harder to climb. You’ll find it tougher to achieve a higher percentage of ownership in your property than you would if its value was higher than the loan amount.

Meaning when the property goes into negative equity, you may encounter difficulties in paying off the outstanding mortgage. You must make sure you can pay off the shortfall left over after the sale proceeds separately, which can be stressful for many sellers.

Financial Flexibility Constraints

Negative equity can mean real problems in getting future loans and can restrict your ability to make moves in the financial world.

Lenders often scrutinise properties with a high loan to value ratio (LTV). If you’re seeking additional credit, you might be in for reduced availability of money to borrow, and higher interest rates. In some cases, it could even mean being unable to secure a future loan at all.

Complications in Relocating

Considering these points, relocating can be a real struggle.

Limited selling options make it harder to move out of the home you’ve already mortgaged. Remember, once sold, you’ll still have to pay back the extra loan amount. And financial inflexibility makes it harder to access funds or get further loans using the property as collateral.

How can You Avoid Negative Equity?

Worried about securing a mortgage? Here are some tips to help you stay cautious and keep you safe from getting into negative equity:

Make a strong down payment

By investing more money when you purchase the property, you’ll start with a higher percentage of ownership. This provides a safety net against slipping into negative equity in a market downturn.

There are a number of ways you can save for a larger deposit. Some have the funds gifted to them by a family member such as their parents. Others, may look to invest money into a lifetime ISA, which offers Government support for first time buyers. Working with an independent financial planner can help you work out the best saving and investment options for your circumstances.

Learn more about choosing the right ISA for you >

Making regular mortgage payments

This’ll help ensure a steady increase in your level of ownership in the property. Overpaying on your mortgage payment can also reduce the overall cost of your mortgage too as this will reduce the amount of time you have your mortgage and your intrest fees will be smaller.

Similarly, avoid interest only mortgages, these do not help you increase your equity share in your home. They only cover the interest charges per month on the mortgage. They can be attractive to some house buyers for their lower rates, but they will not help you increase your equity.

Learn more about our mortgage and finance advice >

Stay informed about market trends and be cautious about borrowing against the property.

The more you’re aware of the market, the better choices you can make. And if you avoid borrowing against the property, it’ll keep your percentage of ownership from further decreasing.

Make sure you do your research when buying your property. They are large financial descisions and they should not be taken lightly. Research the property values in the area and make sure you are paying a fair price. This will likely reduce the chances of falling into negative equity in the future.

Could you easily add to the value of the house? Would adding an extension or renovating add value to the house? If this is the case, you will have more options to minimise the risk of falling into negative equity.

What to do if You have Negative Equity

If you’re in negative equity, there are ways to overcome it with the right approach:

Consider your options.

Research and explore the local property market and consider whether it might rise soon. Make a budget, manage expenses, and consider contacting your mortgage lender about assistance programs, loan modifications or refinancing options.

Think about taking some strategic action.

Can you make extra mortgage payments to ease the problem? What cost effective renovations could you make to increase its value? Have you explored any government sponsored programs that can help you? Focus on what you can control.

Seek professional guidance.

This will allow you to understand your options further and develop a solid plan. This is where we can help you to avoid pitfalls and make informed decisions for complex financial problems like negative equity.

Financial Planning for a Recession with Hansford Bell

At Hansford Bell, we’re not just your ordinary financial planners. We believe in the power of financial life planning—a comprehensive approach, integrated into all aspects of your financial journey. Our aim is to help you achieve long-term financial success and avoid potential pitfalls like negative equity.

With our expertise in mortgage advice, financing options, and our deep understanding of the UK market, we offer tailored recommendations for both individuals and businesses. We leave no stone unturned, conducting extensive research to find the best strategies and opportunities available in the Southwest region.

We take pride in our local expertise and understanding of market dynamics, ensuring that our recommendations are in line with your goals and the unique circumstances of the UK market.

As a regulated firm authorized by the Financial Conduct Authority (FCA), we adhere to the highest standards of professionalism and client care. We value your trust and take customer service seriously, offering personalized advice and support throughout your financial journey.

Get in touch with one of our expert team today, or learn more about Hansford Bell’s financial life planning services and get started on the road to financial independence.

This article is for information only and does not constitute advice.

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