Negative equity - what's it all about and how does it affect me?

Negative equity is simply the term used to describe when your mortgage is more than the value of your home. It could happen when you take on a mortgage for more than 100% of your property's valuation, but it's really much more widely used to describe the result of recent dips in the value of property so that the value of your home is now less than your mortgage.

With reports of annual falls in property values of around 16% it doesn't seem like using the words "dips" is quite right. Well, maybe, but like a lot of things you've got to put things in context. According to the Council of Mortgage Lenders (which all the main lending companies are members of) over two thirds of borrowers with negative equity have negative equity of £8,000 or less. And, unlike the last major episode of negative equity in the early 1990s it's spread fairly evenly amongst borrowers and isn't a first time buyer problem.

If we add in the upturn in mortgage enquiries and falling inter bank lending rates - a first sign that lenders might lend again soon- the overall picture should be that negative equity won't spiral out of control, or may largely disappear as confidence returns to the housing market and prices get nudged upwards.

One of the slightly odd things about negative equity is that because valuing your home isn't an exact science you may not know that you're in negative equity. This isn't all bad, because one of the best things to do is nothing! Having negative equity isn't like an unauthorised bank overdraft; your lender isn't going to start making threatening noises about repaying it. If you're not having any problems in paying your mortgage or don't plan to move house you're fine. Keep saving money, over pay the mortgage if possible, and sit tight.

Even if you do need to move house the CML have said that its members will try to be helpful if you have a good track record of keeping up with your payments and the negative equity isn't too substantial. Our tip for how to save time and effort in finding out your options is that you go to your existing lender - they may give you a sympathetic hearing.

If you are having problems in repaying your mortgage - and there's no evidence that there's a link between this and negative equity - make sure that you speak to your lender as soon as possible. See 'I'm having difficulty paying my mortgage' for guidance on what to do.

Lastly, just to keep things in perspective, there's £2.1 trillion of unmortgaged equity in UK homes - that's still an awful lot of money!

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