Can You Sell Your House If It’s In Negative Equity?

Concerns around negative equity have become increasingly common. Boon Brokers’ latest research into negative equity found that 91% of recent homebuyers are concerned that changes in the housing market could reduce the equity in their home.

If you are thinking about selling a house with negative equity, the main challenge is that your property value will be less than the amount outstanding on your mortgage. To correct this, you will need a plan of action to cover the difference in order to be able to sell.

Selling a property is a big financial decision and so it is important to understand how negative equity mortgages work and consider whether selling is viable or the right option for your specific circumstances. Depending on your situation, there may be alternatives available that are worth exploring.

In this article, we explain the process behind selling a house in negative equity, what a mortgage shortfall is and alternative options to selling that you should consider. Let’s begin.

What Happens If You Sell a House in Negative Equity?

The process of selling a house in negative equity is largely the same as a standard property sale. Your solicitor will request a redemption statement from your mortgage lender, confirming the outstanding balance that needs to be repaid to clear the mortgage.

The difference when you’re in negative equity is simply that the value of the sale will fall short of the outstanding mortgage payments.

Let’s take a look at an example in practice:

• You have £250,000 outstanding on your mortgage
• The value of your property is now £210,000,
• The difference between these two costs would mean you have a £40,000 shortfall.

In this scenario, you would need to cover the total shortfall amount either through personal funds or by arranging a repayment plan with your lender before completion of the property sale can take place.

After the mortgage has been paid in full, your lender will then release its charge over the property and the sale can complete.

There is an important exception to this rule that only applies to Lifetime mortgage products that meet the Equity Release Council’s standards of a no negative equity guarantee.

With this guarantee, should the property be sold for less than the outstanding mortgage amount owed, the lender cannot request repayment beyond the proceeds of the property sale. However, these guarantees are not typically available in standard mainstream mortgage lending.

How Can I Maximise My Property Value When Selling in Negative Equity?

Maximising a property’s value does not necessarily mean you need to spend thousands on major renovations to make your home more appealing. In reality, smaller cosmetic changes, such as adding a fresh lick of paint, completing minor repairs or improving the garden, can all make a difference to how buyers view the property.

When in negative equity, it’s important to be selective about where you spend your money. Expensive renovations do not always add the same amount to your property’s total market value and so it’s crucial that any planned work does not leave you financially worse off.

More often than not, an estate agent with good knowledge of your local market should be able to advise on which improvements could realistically make the most impact and add the most value.

In addition to this, how the property is marketed can also have a significant effect. High-quality photographs, an accurate asking price and a well-presented listing can help attract more interest.

Simply, when you already have a house in negative equity, getting the highest price can make a real difference in helping to reduce the mortgage shortfall you need to cover.

How Can I Cover a Mortgage Shortfall When Selling My House?

Once you know the exact amount of your mortgage shortfall, it is time to start planning on how you will raise the money needed to cover the outstanding mortgage debt.

Every situation is different and your options will depend on your current finances and the total amount you need to cover.

As a guide, here are the most common ways people raise money when selling a property in negative equity:

• Using personal savings: For those who have sufficient savings available, these can be used alongside the proceeds from the property sale to repay your mortgage and clear your debt.
• Selling or refinancing other assets: Other assets that you own may be sold or refinanced to raise funds to help pay the shortfall.
• Receiving a financial gift: A family member or friend may be willing to provide some or all of the money needed to cover the shortfall.
• Agreeing a repayment plan: If you cannot cover the shortfall upfront, speak to your lender. Some lenders may explore alternatives as a last resort, such as agreeing on a repayment arrangement.

Please note that any alternative repayment arrangement will be lender-specific and must be agreed with your lender before the sale can complete.

Whichever route you take, the money needed to cover the shortfall must be available for the property sale to complete. If you cannot cover the mortgage shortfall, selling a property with negative equity may not currently be a viable option.

What Are the Alternatives to Selling a House in Negative Equity?

There are several alternatives to selling a house in negative equity. However, it’s crucial to understand that while delaying a sale can give you more time and opportunity to improve your equity position, it does not guarantee that you will move out of negative equity.

With that said, there are several ways you could use this time to improve your financial position, including:

Improve Your Equity Position

By delaying the property sale and continuing to make repayments on a repayment mortgage, your outstanding mortgage balance will gradually reduce. Over time, this can help improve your equity position.

Your equity position could also improve if changes in the housing market increase your property’s market value. However, future property price rises are never guaranteed, so it is important not to rely on the market recovering when considering your options.

Make Mortgage Overpayments

For those who have additional money available, making mortgage overpayments can reduce your outstanding balance faster and help improve your equity position.

It’s important to check your mortgage terms first as some lenders and mortgage products can have overpayment limits. Many mortgage deals allow you to overpay up to 10% of the outstanding balance each year without charge. However, limits can vary by lender and product and early repayment charges may apply if you exceed your allowance.

Rent Out Your Property

If you need to move but do not need to sell, renting out your property with your lender’s “consent to let” can allow you to temporarily rent out the property while keeping your existing residential mortgage.

It’s important to note that if you plan to rent the property on a longer-term basis, you may need to switch from a standard residential mortgage to a buy-to-let mortgage. Each lender will have their own criteria, so it’s best to contact a mortgage broker or work with your lender directly to understand which options are available to you.

Complete a Product Transfer

Staying with your existing lender and switching to another mortgage deal can be a great option for those looking to delay a sale while improving their current equity position, particularly if your current deal is coming to an end.

If your current mortgage deal is ending and you are concerned about moving onto a higher Standard Variable Rate (SVR), a product transfer allows you to switch to a new mortgage deal with your existing lender without remortgaging elsewhere.

While moving to a new lender can be difficult when you are in negative equity, there may still be options for remortgaging in negative equity depending on your circumstances.

Should You Get Mortgage Advice Before Selling in Negative Equity?

Selling a home in negative equity can carry significant financial consequences, particularly if you need to find additional money to cover a mortgage shortfall. Before committing to a sale, it is important to know exactly what your current mortgage position is and whether there are realistic alternatives available.

At Boon Brokers, we provide fee-free mortgage advice and can review your circumstances to help you understand the options available. Our expert advisers will look at your existing mortgage, equity position and future plans before helping you understand whether staying with your current lender, exploring another mortgage option or proceeding with the sale could be most suitable.

Ultimately, getting advice early means that you can hold all the cards when deciding on the right choice for you.