Unfortunately, negative equity has no easy solution, and borrowers can find themselves trapped in a house without the ability to remortgage.
There are a number of possible options to consider, but every situation is different and some have no solution but to face repossession, as has happened in thousands of cases in the sub-prime market in America.
Help from the Mortgage Lender
For those borrowers with a good payment record, some mortgage lenders offer aid packages to those that have fallen into negative equity.
Some mortgage lenders will lend over their loan to value to help homeowners remortgage to another property, although this may attract fees and prove expensive in the long run. Some mortgage lenders will also provide an unsecured loan to help borrowers escape negative equity, but again costs and fees are attached.
Providing the lender is comfortable with the situation, some borrowers rent out their houses to escape negative equity. By covering the cost of their mortgage loans with the rental income, it can be possible to solve negative equity providing the borrower/s can find somewhere cheaper/free to live.
Whether a consumer letting out their house should employ an estate agent, and which type of tenancy agreement they should employ depends on the individual situation. Furthermore, some housing associations have tenants on waiting lists who could provide rental income. In this instance, the landlord is responsible for repairs to the property, and the rent may not cover the whole of the mortgage repayment.
Selling Your Home
Some borrowers looking to escape from negative equity may sell their homes, but to do so they should seek permission from their mortgage lender. Mortgage lenders are in a position to stop a sale should the sale price not cover the outstanding balance of the loan. Mortgage Conduct policy states that lenders must deal fairly with those in negative equity, and this can include allowing borrowers to remain in possession to sell the house. If a mortgage lender absolutely refuses to let a borrower sell a house, the consumer can apply to the county court for an order of sale.
Getting out of negative equity isn’t easy, but maintaining communication with the mortgage lender is essential. Making sure the mortgage lender knows the full picture, and your financial circumstances, means that unpleasant surprises are less likely. If selling the house, there are numerous conditions that the lender may apply, such as using a particular estate agent or excess charges. Remember, if a sale is decided on, the borrower is still liable for all mortgage payment costs until the house is sold. As well as this, insurance and legal fees, the borrower could be charged for estate agent fees.
There are other ways to escape negative equity, such as borrowing the amount needed from a family or friend, or even a personal loan. Similarly, an endowment mortgage could clear the balance in some instances, although independent financial advice should be taken on this.
Some mortgage lenders let borrowers make lump sum payments off the mortgage loan to help reduce the amount owing, but this will depend on the lender and the loan deal.