The number of households in negative equity will jump by almost 50% over the next couple of years, leaving thousands as potential mortgage prisoners with homes that are hard-to-sell or remortgage.
That’s according to the latest economic forecast from the National Institute of Economic and Social Research think tank, which cautioned that the UK is set for “a decade in the doldrums”.
The analysis from the NIESR suggested that the combination of higher interest rates and falling real wages would further lower demand for property, since prospective buyers are simply unable to meet the affordability tests of mortgage lenders.
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This in turn will result in house prices dropping by around 6.5% between now and the second quarter of 2023, leading to a 50,000 jump in the number of households in negative equity to a total of around 166,000.
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The report suggests this will be seen most keenly in the West Midlands and Wales.
What does negative equity mean for me?
Negative equity can present a real problem for homeowners.
Equity is the term used to describe the value of a person’s stake in a property which is mortgage free. So if you have a home worth £300,000 and an outstanding mortgage of £200,000, then you hold £100,000 in equity.
Negative equity is where the size of your mortgage is greater than the value of your property, likely because house prices have dropped since you bought it.
If you are in negative equity then you will struggle to remortgage. No lenders offer 100% loan-to-value mortgages, while even the level of choice for those looking for a 90-95% mortgage is greatly reduced.
The inability to remortgage means you will have no choice but to move onto your lender’s standard variable rate (SVR) once your initial fixed or tracker rate comes to an end. This can mean a significant increase to the size of your monthly mortgage repayments, since this rate is set by the lender and can be increased at any time, irrespective of what’s happening with base rate.
According to data from Moneyfacts, the average SVR is currently 8.19%.
Negative equity can also prove a difficult barrier if you want to move. The price that you can obtain by selling the property will not be enough to clear the outstanding mortgage, let alone provide a sum that can be used as a deposit for a new home. If you do wish to buy somewhere new, you will need to have the cash to hand to not only settle what’s left of the original mortgage, as well as put down a deposit.
However, it’s important to emphasise that being in negative equity does not mean you will lose your home. So long as you keep up your repayments, the property will remain yours ‒ the issue is that those repayments will become more expensive as a result of being in negative equity.
How to avoid negative equity
There are two main paths away from negative equity. You need to either reduce the size of your outstanding mortgage so that it falls below the value of the property, or you need to increase the value of the property so that it once again exceeds the size of the mortgage.
Over time the size of the mortgage will fall anyway, so long as you keep up your repayments. However this can be accelerated by making mortgage overpayments. Most mortgages allow you to overpay by up to 10% of the outstanding balance each year, without incurring any additional charges.
Overpayments come with the added benefit of allowing you to pay your mortgage off ahead of schedule, saving thousands on interest payments in the process.
Alternatively, you can look to improve the value of your property. This could be through home improvements, like converting the attic into an additional room or adding an extension, though bear in mind that there is no guarantee this will boost your home’s value.
The NIESR believes that property prices will fall because of dropping demand from potential homebuyers, and there are indications that this is already happening. According to the most recent Halifax house price index, property prices dropped by an average of 3.2% in the 12 months to October.
That’s the result of rising interest rates, making mortgages less affordable for buyers up and down the housing ladder. Understandably this has meant many would-be buyers have put their plans on hold, and so the falling demand has meant house prices have dropped.
But over time this can change. As interest rates start to fall once more, we may see interest from potential buyers increase too. Given that the UK continues to have an undersupply of property, any increase in demand will likely push house prices back up as well.
So you could find yourself out of negative equity without choosing to overpay on your mortgage or introduce home improvements, but simply through the passage of time.
