As house prices follow their downward direction, the thousands who obtained 100% home loans are now facing the risk of negative equity. Those borrowers who have not made considerable payments on their 100% mortgage loans are especially in danger and could face losses if they opt to move to a new property. But it can be avoided with a few important steps.
What is negative equity?
It is a condition usually brought about by declining house prices. It occurs when your outstanding mortgage is higher than the market value of your property. This means that each month you'd be paying interest on a loan that's greater than the real value of your house. In other words, if you sell your property, you would not receive adequate money to be able to pay off your loan. If the equity on your house is negative, you could owe your bank thousands of pounds more than your property is truly worth.
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How to avoid negative equity
You can lessen its impact, if not totally avoid it, by following these crucial steps:
* Put down a higher deposit when buying a property. The higher your deposit is, the more equity you have. This means less chances of falling into the negative equity trap. For instance, if the value of your property slides down by £15,000 but you only made a deposit of £10,000, your negative equity will be £5,000. If you had put down a £20,000 deposit, you'd still have equity of £5,000.
* Pay more towards your mortgage loan if you have a repayment mortgage. By paying your mortgage down faster, your equity will grow and your chances of falling into the negative equity trap will lessen. This is possible by making your repayment period shorter. Also, you can choose to make overpayments. Overpaying, which is approved by many banks, helps you increase your equity quickly without having to be bound to higher payments involved in shorter repayment terms. Watch out for overpayment penalties though - read the small print of your contract.
* Take on home improvements tasks. By making home improvements, you can increase the value of your home. This typically means that the market value would have to weaken further before the equity on your property falls into a problematic phase. But make sure that the home improvements you'll be working on will definitely add value to your home.
* If you find yourself in negative equity already, be sure to speak to your lender since they can provide you with solutions to your equity problems. However most of these deals are targeted towards existing borrowers with spotless payment records.
* One way to avoid problems with your equity is to build your home yourself. Self-builders can take advantage of an average 35% equity gain from the day they move into the property, according to self-build specialist BuildStore. One thing to remember when purchasing a property to build yourself is to buy the land below market value from a distressed seller to ensure immediate profits. Finding such properties is possible by locating genuinely motivated sellers.
You don't have to be one of the thousands of borrowers expected to fall into negative equity. The aforementioned advice will help you avoid becoming victim to a stabilising property market.
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