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What can I do about negative equity?

Hundreds of thousands of homeowners across the UK are in negative equity – when you owe the mortgage company more than your house is worth. 17 of the 20 most affected towns are in the north. However, negative equity is not a major problem – until you want to sell your home

Stay put

  • If you can, stay in your home and slowly pay off your mortgage
  • Give it a few years and prices might rise and you will find yourself in positive equity
  • This will either be because property prices have risen, or because you have paid of some of your mortgage
  • Negative equity only becomes a problem when you sell your home, or if you want to borrow against it

Reduce your debt

  • If you have some savings use it to pay off some of your debt. Mortgage rates are almost always higher than savings rates, and you also pay tax on savings interest, so the best return you can get on any spare money you have is to pay down your mortgage
  • Most mortgage companies allow you to pay off up to 10% without penalty, though smaller repayments are also helpful. Check your contract to make sure

If you are struggling with your mortgage repayments you could end up having to sell your house. This is a problem at the best of times, but is a particular problem if you are in negative equity.

  • Because you could end up in serious debt you should seek professional advice
  • Speaking to a real person with experience is far more efficient than trawling through the internet. You can explain you position, and they will be able to give advice tailored to your situation
  • There are a number of places you can go for free, confidential, independent, unbiased and professional advice. Citizens Advice Bureau, Shelter and National Debtline

The HomeOwners Alliance can provide guidance if you are concerned about negative equity. To see how we can help, find out more about the benefits of joining 

Sell and repay shortfall over time

  • Most mortgage lenders will allow you to sell your home and then pay off any shortfall over a period of time.  But this is clearly not an ideal solution
  • You will need your mortgage company’s permission to sell for less than the mortgage is worth
  • You will also need somewhere to live, and to pay all the hidden costs of moving which can total in the tens of thousands

Allow your home to be repossessed

  • This should be avoided if possible
  • Public auctions of repossessed homes tend to attract lower prices than private sales, so you will end up owing your mortgage company more than if you had sold your home yourself
  • Your credit rating will be bad for at least six years, making it more difficult to get a mortgage in future
  • The mortgage lender will be able to pursue you for up to six years for any outstanding debts

Declare bankruptcy

  • The worst option, because after you declare bankruptcy it is very difficult to borrow money again for many years
  • You also cannot act as a director of a company, and face a number of other restrictions
  • Your mortgage lender will still be able to take your home
  • It may be worth considering if you fall into very serious negative equity, and do not believe you will be able to repay your debts for many years after you have sold your home
  • Ensure you get good legal advice before declaring bankruptcy


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3 Comments

  1. Myths to dispel:

    Police are able to be bankrupt and retain their job. However, there are some areas of policing in which they would not be allowed. A teacher in bankruptcy will not lose their job subject to individual terms of employment contract, the same as any other job. I have had lawyers and accountants continue to practice whilst bankrupt but again there are areas in which they are not allowed to practice until discharged. You can have a bank account whilst bankrupt. You can even obtain credit whilst bankrupt but if you borrow £500 or more, you are obliged to inform the lender of your bankruptcy so they can decide if they still wish to lend you the money. If you’re borrowing less than £500, you are not required to inform them of your status. You can go on holiday, even abroad. Your assets such as your home are definitely at risk but it is not a foregone conclusion that you will lose it. Best advice: Don’t bury your head in the sand. Take professional advice as soon as possible. Take control of your circumstances, be strategic and minimise the damage. Do this properly and you’ll probably come to the realisation that it is not as bad as you thought, it was the best thing that could have happened, I wish I did it sooner. It is very often preferable to an Individual Voluntary Arrangement (IVA).

    Comment by Barry Mitchell — January 16, 2016 @ 12:03 pm

  2. You forgot one very import option. If forced to “move”, that doesn’t necessarily mean you are forced to “sell”. Instead of selling the house, simply rent it out. Even though the income from rent will likely not cover the monthly mortgage payment; it will likely cover a large portion of it. Hopefully the new job that required the move has a “raise” involved, even if it doesn’t, make a sacrifice by get an apartment size where the apartment rent + left-over mortgage cost fits the budget. Eventually, after renting out the house for years and continuing to pay the mortgage, you will gain equity, then either re-finance so the income from renting equals the mortgage, or sell the house. If given the opportunity to refinance, that obviously is the better choice; if income from renting is the same as mortgage, someone else is essentially building the equity for you. You may also have the option of raising rent over a period of years if the local economy spikes or due to inflation.

    Comment by Ryan — November 30, 2015 @ 6:29 pm

  3. Great advice however, certain professional such as teachers and Police can not declare bankruptcy because they could end up losing their jobs. Perhaps if you could include that within your excellent blog?

    Comment by Saddat Abid — June 19, 2015 @ 12:00 pm

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