Everything You Need to Know if Your House Falls into Negative Equity

Everything You Need to Know if Your House Falls into Negative Equity

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Having your property fall into negative equity can seem like a nightmare. Here at We Buy Any House, we have compiled a guide to help you understand what to do. 

What is Negative Equity?

Negative equity is essentially where the real estate value of your property falls below the outstanding figure of the mortgage that was used to purchase the property. To work this out, mortgage lenders calculate it by taking the market value of the house as it currently stands and deducting the remaining amount on the mortgage.

When Does Your House Fall into Negative Equity?

The most common reason people find themselves falling into negative equity is due to falling house prices. This is because when house prices fall, the price of other houses that are also in negative equity also begins to rise. This problem is then made worse during period of recessions, as house prices can experience significantly larger drops.

A hypothetical example of this could be: if the price of properties fell around 20% between 2022 and 2024, due to the ongoing financial crisis in the UK which is causing the cost of living to dramatically rise, this would mean that almost 1 in 10 people have mortgages would be in negative equity by early 2022.

Another reason as to why your house may fall into negative equity is due to interest-only mortgages. This is due to the fact that when you take out an interest-only mortgage loan you only end up paying back the interest of the amount that you borrow, instead of paying back the full mortgage sum.  As the total amount is repaid at the end of your mortgage, you aren’t building equity on the property, so if there was a fall in property prices this could put you at risk of falling into negative equity.

What to do If Your Home Falls into Negative Equity?

If your home falls into negative equity, you may have to sell your home for a price lower than the mortgage loan which was approved when you went to buy your home. This is due to the fact that you will have an outstanding amount of balance on the mortgage which you will have to pay back once the sale has happened. If you are unable to pay this back, then it may be increasingly difficult to pay this money back- which will make it harder for you to sell your home.

How to Avoid Ending Up in Negative Equity:

There are a couple of things you can do to protect yourself from ending up in negative equity if you are buying a house, these things include:

  • Questioning the asking price and seeing what the market value is for the property by doing research and speaking to experts.
  • Make sure you are buying at the right time andseeing whether property prices are either high or low.
  • Try and pay a bigger deposit towards your home so your mortgage is less, and you won’t fall into negative equity.

how can I sell house fast?”, head to the We Buy Any House website for more information relating to all property related enquiries.

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