Whenever there is a slump in house prices, it can leave people with a mortgage greater than the value of their home.
This is not too much of an issue if you can afford to keep up with your mortgage repayments and are able to sit out the slump.
However, if you do need to move house being in negative equity makes things a lot more complicated.
Use savings to reduce your mortgage
Before you use your savings to reduce the amount you owe, look at whether this makes financial sense for you:
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Check if you will be penalised by your mortgage provider for paying off a lump sum on your mortgage. If so, will the fact that you will be able to move home worth the cost?
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Work out the amount of interest you would otherwise earn on your savings and any interest penalties for withdrawing them.
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Using your savings would also mean that you would not have access to the money if you needed it later in an emergency.
Stick it out
If house prices recover in the future, this would increase the equity you hold in the property.
However, whether house prices will go up enough to solve your problem in 1 or 5 years is difficult to judge, so you will not know how long you have to wait before you are able to sell.
Staying put and waiting it out is often the cheapest option if you find yourself in negative equity. This will only be an option if you do not need to move, of course.
As long as you continue to pay your mortgage each month, you will not need to worry about repossession and will begin to climb out of negative equity as you reduce the size of your mortgage.
To speed things up and enable you to move sooner, you could start making overpayments on your mortgage – although you should only consider this option if you will not be charged penalties for doing so and can afford the extra outlay.
As a rough guide most mortgages will allow you to overpay by up to approximately 10% without any penalty, but check with your lender, as this is not universal.
You could free up extra money to put towards your mortgage by reducing your outgoings and sticking carefully to a budget.
Boost the value of your property
If the amount you are likely to raise through the sale of your property falls just short of what you would need to break even on your mortgage, there are several ways you can increase the value of your home. An idea is to renovate specific parts of your home to increase the property value. For example, if you want to increase the curb appeal of your home, you can install siding on the home exterior with help from the professionals at Siding Company Dallas (https://www.sidingcompanydallas.com/).
Look at similar properties on the market in your area to see what they offer potential buyers and at what price. You could even arrange a few viewings to see how they compare to your home on the inside and out.
You may find that there are some enhancements that you can incorporate into your own home to add value at an acceptable cost.
Rent out your house
- Most mortgages are based on the agreement that only you and your family will be living in the property
- To rent it out to a third party, you have to change to a buy-to-let mortgage, which could push up your interest rate and repayments
- If you have a fixed mortgage deal, this would break its terms, meaning you could incur charges
If you cannot sell but need to move, renting out your homemay be an option worth considering.
You would continue to own the property and repay your mortgage using rental income while you rent somewhere else until your home comes out of negative equity and you are able to sell.
Whether the rental income will be sufficient to cover your mortgage payments depends on the local market.
Aside from the work involved in preparing your property for rent, you’d need to consider how you’ll manage your new tenants and the property itself. If you want both issues taken care of, hiring a property management company can be the most suitable option.