Negative equity is a situation in which the value of your property is lower than the outstanding balance of your mortgage, and can be an extremely difficult financial position to find yourself in.

Fortunately, there are several measures that can be taken to help avoid negative equity and its associated financial implications. Taking a lower mortgage, by putting down a bigger deposit, will help you to try and avoid negative equity on the property even if the value decreases in the future.

Mortgage payments

Paying your monthly mortgage repayment will build up the equity in your home as the loan amount decreases and you come closer to owning the home outright. If your lender allows it, overpayments are a good option as it brings the mortgage balance down even faster.

The most effective way to protect against negative equity is to ensure that you have a minimum deposit of 20% when purchasing your property. This will reduce the amount of money you need to borrow and, in turn, lower the amount of your mortgage. A lower mortgage will help you avoid negative equity on your property, even if its value decreases.

If you have an interest only mortgage you can make overpayments, however, this reduces the interest you have left to pay, and it doesn't increase the equity in your home. If you have a repayment mortgage, the overpayments you make will decrease the remaining mortgage balance and increase the equity held in your home which means the

Housing market value

You should also make sure that you’re not paying over the odds for your property. Researching similar properties in the same area or neighbourhood can give you an indication of how much you should pay and will provide a good insight as to whether you are paying over the odds.

And if the market is particularly ‘hot’, consider whether you’re able to delay your purchase until the market cools. Prices may continue to rise in the interim, but there’s less chance of you experiencing negative equity if you buy at a lower price point.

Selling a property with negative equity

However, if you are looking to sell your property with negative equity, it is important to be open and honest with the mortgage lender about how you will repay the negative equity back in your property.

You also won't make a profit from the sale and may also lose the deposit you initially paid. You may be able to sell your property and set up a customised repayment plan to repay the outstanding mortgage. If your lender does agree to sell your property you will be charged for the shortfall.

Selling a home with negative equity is rarely advised as you could lose a lot of money on a big asset. You will need permission from your lender to sell this property otherwise you will be in breach of your mortgage terms.

Finally, it’s important to bear in mind that interest rates can also impact your ability to protect against negative equity. If interest rates are high, this can increase your mortgage repayments and reduce the amount of equity in your home. Therefore, paying attention to interest rates is wise when making a purchase. However, if you are able to, it is best to sit tight and wait for the housing market to improve.

If you find yourself in negative equity, it’s important that you speak to an expert who can provide specific advice for your circumstances.

If you are looking for a mortgage or have any questions call 0151 662 0188 or email [email protected]