Nick Youngson / Creative Commons 3 – CC BY-SA 3.0
The phrase “negative equity” is often bandied around by property experts, but it’s fair to say it’s less well-understood by us lay people. This is troubling, because it’s the lay people and landlords who are most at risk of falling victim to negative equity. If you’re not aware of the potential risk this situation can present to your personal finances, then it’s definitely time for you to dig deeper.
Here’s how negative equity can develop in the blink of an eye:
- You buy a house for £100,000. Okay, £100,000 is a pretty low price for a house these days, but let’s keep the numbers round to make the maths simpler!
- Over the course of five years, you repay £20,000 on your mortgage. You have £80,000 outstanding on the mortgage.
- The housing market crashes, as it is prone to do.
- Your house, which was once worth £100,000, drops in price along with the rest of the market.
- Your house is now worth £60,000…
- … but you’re going to have to pay back the remaining £80,000 from your initial mortgage to own it.
- You’re now in negative equity, as you have invested more in the house than it can repay if you sell it.
- Negative equity can happen to the house you live in, and to houses you buy as an investment or entry onto the rental market.
The one upside of negative equity is that it’s not necessarily permanent; if the market rises again, then you’re lifted out of negative equity once more.
However, that’s a big if. If you are careful with your personal finances, you’re going to want to ensure you don’t go into negative equity to begin with. Here’s how you can do that.
1) Don’t Buy When The Housing Market Is At Its Most Buoyant
If the housing market is through the roof, then it’s not a good time for you to buy. Remember: the market goes up, but it also falls. If you buy at the height of a surge in house prices, then it’s far more likely for the market to fall, and potentially place you at risk of negative equity.
2) Have An Expert Assess Your Finances
If you’re buying a house, then dealing with the financial side is not just about how much you can get a mortgage for– it’s about how much you can truly afford to repay. Always have a financial advisor walk through your finances and ensure you’re not over-committing.
This is particularly important if you’re buying a property as an investment, as the start of a property development portfolio, or a way of earning income in retirement. Consult with specialists such as Belgravia Development finance to ensure your finances are in the right place and you have a mortgage that suits your needs and intentions.
3) Be Prepared To Ride Out The Market
If you’re buying a house — either to live in or as an investment — then it’s vital you never rely on a quick turnaround. You have to be prepared to keep the house for longer than is ideal, so you can be sure you have the time to wait for the market to rise again. If this means spending less on a property than you intended, so you’re certain you’ll be able to make mortgage repayments while you wait for house prices to increase, then so be it.
Negative equity can make a huge hit on your personal finances, cause you to lose money on a property, and even damage your retirement plans– so follow the steps above to ensure it never happens to you.