By Rachel Wait
The housing market is in a pretty dire state: first-time buyers are struggling to get on the property ladder, while homeowners are watching house prices deteriorate.
Meanwhile, some homeowners are now faced with the threat of their home being worth less than their mortgage, known as negative equity.
Before the recession hit, a number of people took out 90% mortgages, 100% mortgages or, in some cases, more than 100% of the purchase price. Now that house prices have tumbled, negative equity is an increasing concern for many homeowners.
Should I worry?
While no one wants to end up in negative equity, it only becomes a problem if you're looking to move house or remortgage. If you're comfortably meeting your mortgage repayments and are happy to stay put, it shouldn't affect you. In this case, the best thing is to sit tight and ride out the storm until the housing market picks up.
However, for anyone needing to move house in the near future, negative equity is a major problem simply because you won't have any equity to use as a deposit.
You're also likely to face difficulties if your current mortgage deal is coming to an end and you want to remortgage because few lenders will offer you another mortgage if you are in negative equity. You will probably have to stay with your current lender and can't switch to a better deal.
Some lenders do offer mortgage deals for customers in negative equity, such as Lloyds and Halifax (part of the same banking group). These deals may not be as competitive as other deals on the market, but they are worth investigating.
Many of the mortgage deals which previously allowed you to borrow more than 90% of the property's value are no longer available. In this case, you're likely to have to stay on your lender's standard variable rate (SVR).
This isn't necessarily a bad thing as the low base rate means most SVRs are pretty competitive at the moment. (SVRs tend to move in line with base rate, although this is not guaranteed.) So as long as base rates stay low, you shouldn't find your mortgage rate is too high.
How to deal with negative equity
If you are in negative equity, one of the best ways to get yourself out of it is to build up the equity in your home by overpaying your mortgage if you can afford it. Some lenders will allow you to overpay your mortgage by up to 10% a year (£500 a month in the case of Nationwide), penalty-free. A few have no restrictions on overpaying.
You could also look to make improvements to your home that would add value. This could be anything from getting new floors or carpets laid, redecorating, getting a new bathroom or kitchen or even a loft conversion. Again, however, only do this if you can afford to.
What to do if you're struggling
Talk to your lender if you're struggling to meet your mortgage repayments. There's nothing worse than leaving your lender in the dark. It may be willing to offer you a temporary lifeline such as extending the term of your mortgage or taking a payment holiday. Just be warned that this will mean you'll end up paying more interest overall, but it may help you in the short-term.
If you're in serious financial difficulties, you could also consider selling your property. But remember that if your home sells for less than the outstanding mortgage, you will still need to make up the difference to pay back your lender.
Of course, this is really a last resort and will only be necessary if you're falling significantly behind on your mortgage repayments. Being in negative equity doesn't go hand in hand with failing to keep up with your monthly repayments. The main thing is to always keep your lender in the loop about your situation and if you are in negative equity, don't panic before considering your options carefully.
