The nightmare of property related negative equity

Negative equity occurs when your property's value falls below the outstanding mortgage amount. In the UK property market, this situation most commonly affects those who purchased at market peaks or with high loan-to-value mortgages.

With current difficult economic conditions and interest rates higher than for many years, negative equity may become an issue for some homeowners, especially if the property owner becomes out of work. Understanding the risks and options at least allows forward planning.

Options for selling if you have negative equity?

• Lender permission required - if the likely sale value of your property is less than your outstanding mortgage, unless you can raise alternative funds (see below) a major implication is that you lose control. You cannot sell a property in negative equity without your lender's consent. You sill need formal, documented approval from your lender before the property can be marketed or sold. Your lender will likely insist on a legally binding arrangement detailing how the remaining debt will be paid after sale proceeds are applied and possible a suitable personal guarantee from a 3rd party also, often a family member.

• Make up the mortgage shortfall - by using personal or family savings to bridge the difference. Must be documented and source of funds verified.

Waiting it out

As long as you can maintain mortgage payments, staying in negative equity can be sensible because:

• Property markets historically recover over time

• Your mortgage payments are slowly reducing the debt while you wait

• You continue to have a home and avoid rental costs

• No damage to credit rating if payments maintained

• Property improvements can help increase value during waiting period

• Interest rates and market conditions may improve

The key is affordability of monthly payments - if these are manageable, waiting out negative equity retains some control and often makes more financial sense than selling at a loss.

What happens if the lender refuses consent?

If your lender refuses permission for a negative equity sale, several options remain available. Understanding your legal position and rights is crucial for navigating this situation. Legal options include :-

• Formal complaint - submit detailed complaint through lender's procedure, then Financial Ombudsman if necessary. Must demonstrate unreasonable refusal.

• Voluntary repossession - last resort may be surrendering property to lender. Creates serious implications for credit rating and future borrowing. Part of potential negotiating position for borrower is that the English courts are reluctant to evict families with children under 18, often granting multiple adjournments to find alternative accommodation. Lenders also have a legal duty to take reasonable steps to achieve the best price reasonably obtainable at time of sale. This means marketing the property appropriately and considering market conditions, though they don't need to wait for optimal market timing. The owner can challenge the sale price if the lender fails in this duty.

• Try to negotiate - 1 possibility is offering additional/enhanced security, offering additional security or guarantees from family members.

Contact us for confidential advice in you have a potential or known negative equity situation.