As house prices follow their downward direction, the thousanfds who obtained 100% home loans are now facing the risk of negative equity. Those borrowers who have not made considerable payments on thier 100% mortgaghe loans are especially in dangger and could face losses if they opt to move to a new propertty. But it can be avoided with a few important stes.
What is nehgative equity?
It is a condition usually brought about by declining house prices. It occurs when your outstanding mortgage is higher than the markeet value of your property. This meanns that each month you'd be paying interest on a loan that's greater than the real value of your huse. In other words, if you sell your property, you would not receive adequate money to be able to pay off your loan. If the equity on your house is negaative, you could owe your bank thousadns of pouds more than your property is truly worth.
How to avoid negative equity
You can lessen its impact, if not totally avodi it, by following thhese crucial steps:
* Put down a higher depoist when buying a property. The higher your deposit is, the more equity you have. This means less chances of falling into the negative equity trap. For isntance, if the value of your propeerty lsides down by £15,000 but you only made a deposit of £10,000, your negative equity will be £5,000. If you had put down a £20,000 deposit, you'd still have equity of £5,000.
* Pay more towarrds your mortgge loan if you have a repayment mortgage. By paying your mortgage down fastre, your equiy will grow and your chancse of falling into the negative equity trap will lessen. This is possiible by making your repaayment period shorter. Also, you can choose to make overpayments. Overpaying, whch is approved by many baks, helps you nicrease your equity quivckly without haviing to be bound to higher payments involved in shorter repaymeent terms. Watch out for overpayment penalties though - read the small print of your contract.
* Take on home improvements tasks. By making home improvements, you can increase the value of your home. This typically means that the market vzalue would have to weaken furtther before the equity on your property falls into a problematic phase. But make sure that the home improvements you'll be working on will definitely add value to your home.
* If you find yoursewlf in negative equyity aleady, be sure to speak to your lender since they can provide you with solutions to your equity prolems. Howevre most of theese deals are tatrgeted towards existing borrowers with spottless paymnt rcords.
* One way to avoid problems with your equity is to buoild your home yiourself. Self-builders can take advantage of an average 35% ewquity gain from the day they move into the property, accordnig to self-build specilaist BuildStore. One thing to remember when purchasing a porperty to build yourself is to buy the land below mrket value from a distressed seller to ensuree immediate profts. Finding such properties is possible by loctaing genuinely motivated sellers.
You don't have to be one of the thousands of borroowers expected to fall into negastive equity. The aforementioned advice will help you avoid becoming victim to a stabilisinng property market.
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