October 28, 2022 0

Need to Sell Your House But You’re in Negative Equity? Here Are Your Top Options

in Selling & Buying

Need to Sell Your House But You’re in Negative Equity? Here Are Your Top Options

It can be difficult to know what to do if you are in negative equity and need to sell your house. Selling a home when it is worth less than the money you still owe on it is called being in negative equity, and it can be a real challenge. If this is your situation, don’t worry – we have some tips for you! In this blog post, we will discuss some of the top options for selling your house when you are in negative equity. So read on for all the information you need!

Negative equity is a hugely upsetting problem, it occurs when the amount owed against the property is more than the property is worth. This normally happens when house prices slump e.g. in the financial crisis around 2008. This problem becomes worse if you need to sell the property as you’ll end up in a position of having to sell your property for less than what you originally paid for it. If this happens, you will have to make up for the shortfall.

What does Negative equity look like?

If you purchased a property at £300,000 with a 90% mortgage (Using a £30,000 deposit) meaning you were borrowing £270,000

Did you know in the financial crisis of the 2000’s property prices fell by over 26%?

If the price of the property fell by 20% it would only be worth £240,000 but you would still be borrowing for a property priced at 300,000 so you’d still owe the bank the £270,000 and need to pay the extra £30,000 difference before you could sell or move property. This is known as negative equity as you owe more than the equity of the property is worth. It means you are stuck in that property and either need to pay up or wait for the prices to rise again.

Problems of negative equity

In its self it’s not a problem so long as you can keep paying the current mortgage, some of the biggest issues might arise when the mortgage term ends and you need to find a new one. It might be difficult to find a new one, especially one with a good interest rate which can be important if mortgage rates change. It can be worth talking to your bank first, most lenders would rather you continue to pay off your mortgage instead of going bankrupt. They might be able to help accommodate you and any changes in circumstances.

How to sell a property in negative equity?

If you’re looking at how to sell a property in negative equity there are a few options open to you. Negative equity only becomes a problem when you are looking to move, as long as you can pay the mortgage repayments you can stay on the premises. You will need to clear the difference in the property market value and the outstanding debt with the mortgage.

Options for selling a house with negative equity

Do nothing

If you can repay the mortgage and can wait it out the property price might not keep you in negative equity, this might not be an option for everyone but if you can, try and wait until the property market improves. The UK ‘credit crunch’ took around 7 years to correct itself.

Selling in a down market is never going to give you the best possible price for your home, so it might be worth holding onto it until values start to increase again. This could take a while.

If you are struggling to keep up with repayments or think you might miss one, the first thing you should do is speak to your mortgage lender. They may be able to help you by changing the terms of your mortgage, such as extending the repayment period, giving you a payment holiday or helping you to plan and negotiate different monthly repayments.

Try and negotiate with your mortgage lender

The first thing you should try is talking to your mortgage provider, they can offer help or advice on your options and might be able to get specialised mortgage products like a ‘negative equity mortgage’’ whilst not many lenders offer this it can be an option. You’ll still need to settle any other associated fees like interest penalties etc. You’ll also be moving the debt on rather than clearing it.

Use savings account

The most uncomfortable but possibly straightforward solution is to pay the difference you owe on the outstanding mortgage. This can leave you worse off you you shouldn’t rush into any decisions and you might still need to pay off interest penalties and any other moving costs so make sure you have enough left to help with any other moving costs you may incur.

Getting a loan

More debt seems counter-intuitive but getting an unsecured loan could be a cheaper way long term to move to a different property whilst being able to pay off the owed amount. Check the interest rates to see how quickly you can pay this off but just be careful not to get caught in a debt spiral

Renting the property out

Not an option for everyone but you can rent the property out whilst you wait for the property prices in the area to recover. you need to make sure that rental income will not just cover the mortgage payments but you’ll need to factor in any other running costs and void periods when working out if this option is viable for you as an individual. The problem with this option will be if you were trying to go up the property ladder and needed the capital to help move ‘up’ into a new (and maybe better) house.

Sell to a quick house buyer

This option is not going to fix the negative equity, it’s probably best to compare it to ripping a bandage off. As all fees are included you can roughly calculate the lump sum you’d get for the property and this might enable you to move on and purchase another property. You would have to access the loss and pay off the mortgage but at least you’ll have a clear idea of options available and it can be the fastest way to get out of the problem even if it means you need to accept the loss.

Voluntary hand of the keys back to the bank (known as strategic default)

strategic default is not common and was a larger issue in the previous crisis but it involves just handing the keys back to the bank, The bank of England recently listed some of the reasons you might do this. If you don’t have much equity to lose some people will just walk away from all debt. You should seek professional advice if you are considering this.

Negotiate a short sale with your lender

More common during the last financial crash when there were a lot of people defaulting. it involves the mortgage lender forgiving the extra debt. This is due to the requirement of getting a property repossessed will cost the bank time and money and it might be similar and cheaper to forgive the debt. It can be worth talking it over with your bank but don’t expect it to be easy and it is mostly the last option

Bankruptcy

This is the nuclear option, it means you cannot afford the property and will destroy your credit rating meaning you might not be able to get a new mortgage. You might be able to start again but unless you are struggling we do not recommend this and you should seek other repayment options before considering this.

Increase the property value

If your property loses value one option can be to increase the value again. A new kitchen, new carpets or even adding extensions might make up the value owed in the mortgage though you’ll have to carefully balance the cost out vs the return on the property. This can sometimes be as simple as just deep cleaning the property or a lick of new paint which can go a long way and be a difference to help potential buyers.

If you need help with debt you should talk to the citizen’s advice who have some excellent advice on what your options are, it can also take a toll on your mental health so remember: you’re not alone!

In Summary

Selling a house with negative equity can be a difficult process, but there are options available to help you through it. You can try to increase the value of your property, negotiate a short sale with your lender, or even rent it out while you wait for the market to recover. Bankruptcy should be seen as a last resort, and cash buyers can provide a quick and easy solution if you need to sell your house fast. Whatever route you decide to take, make sure you seek professional advice to ensure you are making the best decision for your situation.