Negative equity: What should you do?
The equity in your property is the value of the house minus the money you have secured against it. Put simply " Negative equity is when your property is worth less than any outstanding mortgage you have on it"
You purchased a property for £100,000 and have a mortgage of 90% Loan to value "£90,000". If that properties value would go down below the £90,000 mark, you would be in negative equity. In the case of the properties new value being £80,000, you would have negative equity of £10,000.
Selling a property with negative equity
If you decide you need to sell your house with negative equity, It would be a smart move to initiate talks with your mortgage lenders before anything else, As selling the property at a lower price than what you paid for it will likely not go very far once you are in legal. If you have means to pay off the mortgage from an alternative source of funds, then you should not have any problem.
How to avoid selling in negative equity
If you want to sell your house but avoid the pitfalls of being in negative equity, There are some options that you could consider.
1.) Try paying off as much of the mortgage before you sell, Use any savings or other source of funds so the property is no longer in negative equity
2.) Take out a loan to cover the mortgage shortfall between the sale price and outstanding loan.
3.) Make efforts to increase the value of the property, via home improvements etc.
4.) Wait for the market to go up in your local area.
If you are at the point where you need to sell. It is most important that you discuss this with your lenders first. They may actually agree to the sale if it is preventing repossession. It is likely the lenders will choose from a panel of approved agents to get a reliable valuation on your property, however.
Alternatively, there are some mortgage products out there which will allow you to transfer negative equity into a new home where you can chip away at the debt. This type of product is most likely going to be expensive so it is worth exploring all of your other options first.