How can you Avoid or Get out of Negative Equity?

Negative Equity is a situation when the home that you are buying using a mortgage is worth less than the value of the mortgage. This happens when your home drops in value after you have bought it as a lender would never lend you more money than a property is worth. This can create problems if you want to move home, as you will not have enough money, after selling, to repay what you owe on the mortgage. There are ways though that you can get out of it and ways that you can prevent it.
If you want to avoid negative equity then the best way is to make sure that you borrow a lot less money to pay for your home than it is valued at. This means that you will need to save up for a really large deposit. Most lenders will require between five and ten percent of the house value as the deposit. However, the more that you can put towards it, the less chance you have of being in negative equity. This is because the amount you borrow I a lower percentage of the value of the house, so even if the house goes down in value you will be less likely to find that the value is lower than the loan value.

Of course, you can also avoid it by buying a property which will not go down in value, but this is much more difficult to predict. If the housing market falls as a whole, although some individual properties will not lose value, it is very difficult to predict which these will be. There is no magic formula, it just depends on demand for those specific properties at that point in time. There are other things though, not just market changes which can make the price of a home fall. These can be threat or actual flood, subsidence or anything that is likely to put your home at risk. There could be specific incidences happening in the area, perhaps crime, development, an increase in reputation of a local school or things like that which could change how much homes in an area could be felt to be worth. A certain amount of research could help to protect against some of these things, but they are difficult to control. One thing that you can control though is the condition of your home. If you make sure that you keep it in good condition, looking after the structure of the home as well as keeping it looking good that will help to protect against a fall in price. A home that falls into disrepair will certainly be worth less than one that is well maintained.

Once you are in negative equity, it may feel that you have no choice but to wait until house prices rise again in order to get out again. You may feel trapped, that you will not be able to move house and this could cause other problems, perhaps if you wish to relocate with work or to be nearer to family members. However, there are solutions.

If you want to move, then you could save up for a deposit. Then you can use that money to offset the difference between the house price and what is owed on the mortgage. How much you need will depend on the amount of negative equity and how much a lender is willing to accept towards the down payment on another home, assuming that you want to buy another rather than move to rental. If you do not want to move, but just want the security of not being in negative equity then your lender may allow you to make some overpayments on your mortgage to reduce what you owe and therefore get out of negative equity.

The problem can be more difficult if it is caused by floods, subsidence or other similar problems. Not only may your home be worth less than it was, even if you wanted to sell it, you may struggle and your insurance is likely to go up as a result. However, if you do want to move then you may be able to rent your property out to someone and then get a rental income from it. This could help to cover the mortgage and increased insurance costs and will allow you to be able to afford to live elsewhere.

If the home has fallen into disrepair, then you may be able to organise some repairs and cleaning in order to get it back to a good condition and this could be enough to be able to bring the value back up again.

If the area has fallen out of favour, then it is harder to increase the price. Even if you make improvements, you may find that you still cannot increase the value as the area is just not desirable. You could just wait and hope that things improve or you could consider renting it out, as mentioned above, in order to give you the income and freedom to be able to move.

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