Negative equity is when your home is worth less than what you owe on your mortgage. Short periods of negative equity may be uncomfortable but can be tolerable. Extended periods of negative equity can, however, be hugely challenging. You should, therefore, do everything you can to avoid it. Here are four tips to help.
Never overpay for a property
This may sound like stating the obvious but it can be a serious trap for the unwary. To avoid it, you need to have a clear idea of what a property is worth at the time you want to buy it. Ignore the potential for capital appreciation, just look at the current market value. Then look at the general market dynamics and see if there is anything you can glean from them.
In particular, look for any evidence that the housing market is on a strong upward run. If it is, you could be in for a period of negative equity if the market cools again. Over time, you can reasonably expect general inflation to do its work and increase the value of your home. You do, however, need to think carefully about whether or not you can afford to sit tight while that happens.
Never let yourself be tempted into making an emotion-fuelled offer to secure your “dream home”. If it’s meant to be yours it will be, at the right price. If it’s not, it wasn’t meant for you so move on. If you’re outbid (or gazumped) remember that the bidder may not have financing in place. If they don’t, they may find themselves unable to make good on their offer and the property may come back on the market.
Pay for a proper home survey
This is effectively a sub-point of not overpaying. It is, however, important enough to be highlighted on its own. Your initial offer for a property will be based on the information given by the seller plus what you’ve seen with your own eyes.
In principle, the seller should declare any known issues with the house. In practice, you cannot rely on this. The seller may genuinely not be aware of them. Alternatively, they may hope to get away with not declaring them.
In theory, if a seller fails to declare information on sales deeds, you may be able to take legal action against them. In reality, do you really want to have to deal with the hassle and expense this would probably involve?
A proper home survey goes into much more depth than a simple valuation. That’s why it costs more. It is, however, an excellent investment against negative equity. Not only can it identify current problems, but it can also flag up potential future issues.
The result of a survey will allow you to make a more informed decision about whether you want to proceed with the purchase at all. If you do, you’ll be in a better position to assess the agreed price. For clarity, deliberately “gazundering” a seller is unethical but revising an offer in the light of new information is perfectly reasonable.
Maximise your deposit
It’s an old piece of advice but it’s a solid one for many reasons. The larger your deposit, the more house prices can slide before you end up in negative equity. Please note, however, that large deposits should not be used as an alternative to doing proper research on the fair market value of a property for sale.
Be careful about releasing equity
The more equity you have in your home, the less chance you have of landing in negative equity. For this reason, it’s important to be very careful about releasing equity in your home. There may be times it is justified, even sensible, but be sure to get proper financial advice before you make any final decisions.
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