negative equity
Negative equity is when the value of an asset is less than the outstanding balance of the loan secured on it. We usually mean that the amount left to pay on your mortgage is greater than the value of your home.
According to the Nationwide Building Society yesterday, 1.2 million Brits suddenly find themselves in negative equity. In a downturn like this one, when the house market is sluggish and property prices are falling, whether or not you find yourself in negative equity is usually a function of when you bought your house rather than a consequence of bad planning or poor decision-making. If you bought last summer with a high LTV mortgage (Loan To Value) you’re more likely to have negative equity than if you bought 3 or 4 years ago.
So in that sense, if the property is your home, and you’re not in a position where you need to sell up, you shouldn’t worry about negative equity – the financial health of the nation is cyclical, so if you sit tight and don’t fall into arrears then the loss is on paper only. As the market picks up, as it inevitably will, the value of the home will, at some point, exceed your mortgage balance – the only question is when.
That said the slightly flippant title of this post does not apply if:
a) you need to sell
b) you’re coming to the end of a favourable fixed rate deal
If you really need to sell now, and the alternatives (e.g. renting in the short term) are not possible, you’re going to lose money. If you’re coming to the end of a good fixed rate deal, it’s quite possible that defaulting to your lender’s Standard Variable Rate (SVR ) is the best option. One caveat – some of the recently nationalised banks have stopped lending. If you’re in negative equity and your current mortgage is with one of these institutions (e.g. Bradford and Bingley) you ay find it difficult to re-finance. We recommend speaking to a suitably qualified Independent Financial Advisor as soon as possible.
Just ask.
