What Is Negative Equity and How Is It Calculated?

September 23, 2020 5:36 pm

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Equity refers to how much of a property a homeowner actually owns in terms of value. So negative equity is the term used when the property value is less than the mortgage value. This tends to happen when there has been a crash in the housing market, recession or a financial crisis. This does not mean you will be treated differently and bear any penalties.

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Calculating Equity

Calculating negative equity requires a few stages. To start with, a property should be valued via a survey. The homebuyers survey cost is reasonable when compared with what you are getting; an unbiased examination of the property will give you a reasonable idea of the value in the current property market climate. Once the value has been obtained, the outstanding value of the mortgage is deducted. If over zero, this is the property equity. If the result is below zero, then the property is in negative equity.

If there is a risk that you can’t make payments, contact your mortgage lender and let them know your situation and see if they are able to offer an alternative and more sustainable payment schedule.

Managing Negative Equity

Understanding the value of your property and what has caused the change helps. Falling house prices will be the most common reason, along with owners having borrowed more money to get a mortgage in the first instance. For example, if you borrow £50,000 to buy a £100,000 house, your loan-to-value (LTV) is 50%. If the value of the house falls below that £50,000, then you would be in negative equity. Those who borrowed high LTV amounts are more at risk.

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For those looking for a homebuyers survey cost can be another aspect to consider. You want to ensure that the information is correct so that you can make sure your future decisions are made based on the right value. So what does a homebuyers survey cost? You will want a reputable firm, preferably someone who knows the area well, and costs will vary according to region.

Being in negative equity sounds negative. However, as long as you are not looking to move home in the near future, it is possible to maintain regular payments on your mortgage and wait for the property market to recover. The property market is susceptible to all kinds of external influences and continuously rises and drops.