Dealing with Negative Equity – What to do?

The spectre of negative equity first appeared on a significant scale during the housing market crash in 1990s when interest went up so high that no one could afford to pay or take out a mortgage. The problem is now back and is worse than ever.

This time interest rates are not the problem, but the banking crisis and general recession has made it difficult for would be buyers to obtain mortgages and so caused a sharp fall in house prices. This is coupled with the fact that many current homeowners obtained a 95% or even as much as a 105% mortgage to buy their homes. Others have taken out secured loans on top of their mortgages.

First of all, what is negative equity? The equity in a property is the amount of money which would be left over after the property was sold and all the debts secured on it were repaid, so if the total debt secured on the property is greater than its market value, you are said to be in negative equity, as the equity amount is actually less than zero. Second of all, if you are in negative equity, what do you do about it?

Don’t Panic About Negative Equity!

Just because you are in negative equity, you don’t necessarily need to worry about it. Provided you don’t plan on moving house in the immediate future and provided you are still able to maintain your mortgage payments, it shouldn’t affect you at all. Over the course of time house prices will eventually increase and of course the amount you owe will decrease, so you still have a valuable asset, albeit it will take a few years longer than you expected to mature.

Do Increase Your Mortgage Payments If You Are Able

Although as mentioned above you don’t need to panic, if you can get out of negative equity sooner rather than later it is worth doing, as you never know what it is around the corner. You may fall on hard times and have to sell or increase the size of your family and need more space, have cause to relocate to another part of the country or simply want to remortgage for a better rate (you won’t find a lender willing to lend above 90% of the value these days).

Since you can’t do much to increase the value of your home, the best option is to reduce the amount you owe on it. You could do this by increasing your monthly mortgage payments, if you are able to afford it. Speak to your bank; provided you are past any initial fixed rate period you should be able to do this without incurring a penalty. Even during the fixed rate period you should be able to pay a certain amount. It does not have to be a permanent arrangement and it may prove to be one of your wiser investments. Even if you never need to move, you will still pay off your mortgage that little bit sooner.

Dealing With Negative Equity if You Can’t Keep Up Your Payments

The real problem with negative equity is when it is coupled with an inability to keep up with your mortgage payments.

You have to sell to avoid repossession but can’t find a buyer who will pay enough to pay of all of the debt and cover the costs of sale. So what can you do?

Most people assume they will just have to wait to be repossessed and this is often the case, but there may be another way. First of all, remember that banks don’t want to repossess. It is expensive and does not help their image. From your point of view, as well as costing you more money in the long run (as you will ultimately be responsible for all of the legal and other costs associated with repossession) it will seriously damage your chances of obtaining a mortgage on decent terms in the future. It is therefore worth considering negotiating with creditors to allow a sale to proceed.

Negotiating with Creditors

The first thing to note is that you are not asking any creditor to write off a debt. You will still be liable for whatever is owing after a sale. You are simply asking them to unsecure the debt to allow you to proceed with a sale. Your creditors will want to see evidence as to why you need to sell. You should therefore prepare a list of your incomings and outgoings (often called an income and expenditure statement) to show that you can no longer meet your repayments. Be prepared to provide evidence in the form of wage slips or bills/receipts for any expenditure items. This statement will also show whether you are likely to be able to pay anything toward the debt after the sale.

If you have more than one debt secured on the property, find out how much you owe to each lender. Generally speaking, the lender whose debt was registered first will be entitled to be paid in full (if the proceeds are sufficient) before any second lender, who will be entitled to be paid before the third lender and so on. On this basis, work out how much each lender will receive and write to each of the lenders who will not be paid in full with:

  • Confirmation of the sale/marketing price together with a valuation or letter from an estate agent confirming the value;
  • A statement showing how much approximately each lender will receive from the sale, even if that amount is zero (don’t forget to deduct the costs of sale;
  • Details of any repayment proposals you are able to make and;
  • A request that the lender release its charging without receiving full settlement and explaining that as you are unable to pay your mortgage the alternative is that you will be repossessed and so be placed in a worse financial position.

You will need to be persistent and you will almost certainly come under pressure to maintain your payments but if it makes business sense for the lenders to allow the sale to proceed they often will.

Once you have each lender’s agreement you will need to provide any letter confirming their agreement to the solicitor acting for you in the sale. He or she should be able to contact the lenders and deal with the formalities of obtaining the appropriate discharge documents from the lenders or their undertakings to supply these on completion of the sale.

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