01 August 2009 Credits: www.channel4.com
Is Negative Equity Really So Bad?

The press is currently full of scary headlines suggesting over one million people are in ‘negative equity’ and that this is a serious problem. But just how bad is it?

By Kate Faulkner


During a recession, it's not unusual for people to find themselves in negative equity. And, many who were in this position in the 1990s went on to make a fortune from their home during the massive property price growth between 1997 and 2005.

What Is Negative Equity?
This is where the value of the property you own is worth less than the amount you borrowed via a mortgage. For example, if you bought a property in 2007 for £200,000, it is likely in 2009 to be worth less, say £170,000. So if you took out a 90% mortgage, you will owe the lender 90% x £200,000 = £180,000. That’s £10,000 less than the property is currently estimated to be worth.

Is Negative Equity Really So Bad?
However, it’s only the press that really get hung up on declaring major headlines when prices fall and this is mainly because it attracts viewers and sells more newspapers. In reality, the only people that are affected by negative equity are those that desperately need to sell. The number in this situation is far less than the ‘one million’ people declared ‘in trouble’ financially.

For those that are in negative equity, as long as you can continue to pay your mortgage and are not forced to sell, all it means is that it’s better for you to stay in the property, rather than move anywhere else. That is until such a time as prices recover and your property is worth as much, and even more than you originally bought it for.

Even if you are in a situation where you have to move, it’s not necessarily disastrous. It may be that you can rent out your property and cover all if not most of your costs and either move back home for a while, share with friends or rent something that you can afford. Ideally don’t sell your home if you are in negative equity, or the mortgage lender will expect you to pay the balance back and chase you for it, even if you haven’t the money to pay them.

Avoid Quick Cash Sales
Be aware, there are people that are currently trying to take advantage of those in a vulnerable financial position. They typically advertise ‘quick cash for properties’ and what they are hoping to do is buy your property at a substantial discount. They might even offer for you to rent the home back from them. There are some companies that do this ethically, even sharing any future value increases with you, or offering for you to stay in the property rent free for a year. However, there are cowboys and they may offer this, but then chuck you out within six months, or even faster!

Before you consider selling your home for a quick cash sale, do make sure that you check locally with agents what they think is a fair price to accept for your home, and if you can afford it, secure an independent property valuation from a surveyor. It might cost a few hundred pounds, but it could save you thousands.