Negative equity is when you own a home and the value is less than your mortgage. Unfortunately there may not be an immediate solution, but there may be potential options to explore.
Contact your lender
There may be schemes run by your lender to assist with negative equity, you should contact them to see. Some lenders also have packages for their current borrowers but usually only if you have a good payment history (for example borrowing more than the value of your home, if you decide to move). The lender may set a maximum amount of debt on the old mortgage that can be included in your new mortgage. There may also be leverage to pay off the old mortgage debt over a shorter time, such as ten years rather than 25 years.
Some schemes may insist on a guarantor as security for the new loan, this would put the guarantor's house at risk too if you cannot afford the payments.
You may be able to clear the negative equity by obtaining an unsecured loan from your bank or building society. It is likely to be more expensive than a secured loan because a higher rate of interest is usually charged, and monthly payments higher (as payments will be for a shorter term) but an unsecured loan will not put your new house at risk.
You could enquire with other banks and building societies, to see if they offer schemes to all borrowers other than their existing customers.
Renting out your home
This may be an option, if you have somewhere else to live, for example with relatives. You need to take into account that you will remain responsible for the mortgage, repairs to your home and the rent may not cover the full monthly mortgage amount . You will also need permission from your lender (an extra percentage may be added on to the mortgage interest rate).
Sometimes local housing associations are willing to rent out the property on your behalf.
Selling your home
The FCA Mortgage: Conduct of Business Rules state that a lender must “deal fairly” with anyone in arrears. It also says the lender must “give consideration to the customer being allowed to remain in possession to effect a sale”.
Therefore if you cannot afford to stay in your home, the lender must look seriously at allowing you to sell yourself. You do need your lenders permission to sell, as they can stop a sale going through if the sale price is not going to cover the outstanding mortgage. Your lender may have an ‘assisted sale’ scheme that can help you. Your lender may even help with your legal fees and write off some of the shortfall.
Help from the court
If your lender refuses to let you sell your home, it is possible to apply to the county court for an order for sale under the Trusts of Land & Appointment of Trustees Act 1996.
The Judge can order a sale on whatever terms they consider to be reasonable, even if your lender objects.
Handing back the keys
As a last resort you may decide to hand back the keys to your lender and deal with the remaining mortgage shortfall once your lender has sold the property.
The disadvantages to this option are:
- Details will be filed with a credit reference agency for six years and you will be unlikely to obtain another mortgage in the near future
- You would be seen to have made yourself intentionally homeless, making it difficult for you to be re-homed by the local authority
- You will still remain liable for the mortgage payments until the house is sold
- The liability still remains with you for interest charges, costs for estate agents, legal fees, as well as repairs and insurance
- You will still have to pay council tax if you remain in the property (discounts may apply if the property is unfurnished and empty and where the lender has taken legal possession)
Mortgage Indemnity Insurance
You should seek legal advice about the terms of any mortgage indemnity insurance policy you may have on your mortgage to see if the terms could be interpreted as covering you as well as your lender.
Switching from Endowment to Repayment
You should always seek independent financial advice when considering changing from an endowment to a repayment mortgage.
Points to consider are:
- You could lose out on payments you have made on your endowment if you surrender the policy early on, as it may not be worth as much as you paid in
- With a repayment mortgage you would be paying part-capital and part-interest each month (reducing the balance you owe on the mortgage over time and therefore reducing your negative equity)
- The possibility to make extra lump-sum payments off the mortgage to reduce the balance (you should ensure that the lender accepts the payments off the capital balance and not just as advance payments off your monthly instalments)
If you feel your lenders behaviour has been unreasonable or they have treated you unfairly you should first send a letter of complaint to them. If you are not happy with their final response you can complain to the Financial Ombudsman Service.
The Financial Conduct Authority (FCA) regulates mortgages taken out since October 31 2004 and also deals with problems with existing mortgages but not secured loans regulated by the Consumer Credit Act 1974.
Financial Ombudsman Service
T: 0800 023 4567 or 0300 123 9123
Financial Conduct Authority
T: 0800 111 6768 and 0300 500 8082
You can find a list of local housing associations on the Housingnet website.