Scottish Property magazine

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Words by Ross Walker
Personal Finance Solutions

"If you are in negative equity and need to move home we are here with options for you"

Negative equity occurs when the price of a property falls so dramatically that it is no longer worth as much as the loan that was taken out on it.

This means that the bank or building society no longer has enough security to cover the loan. It is estimated in Scotland that 13% of homeowners are currently in negative equity.

Negative equity, while not a cause for panic in itself, can make things more complicated if you do need to move. This isn't too much of an issue if you can afford to keep up with your mortgage payments and are able to sit out the slump. However, if you do need to move house being in negative equity makes things a lot more complicated.

If you are in negative equity and need to move home, here are your options:

  1. Use savings to reduce your mortgage. The first option you should consider when you're looking to move out of negative equity is whether you could use any savings you have to reduce the amount you owe. It's important to look at whether this course of action makes financial sense before pressing ahead.
  2. Stick it out. Staying put and waiting it out is often the best and cheapest option if you find yourself in negative equity. As long as you continue to pay your mortgage each month you don't need to worry about repossession and will begin to climb out of negative equity as you reduce the size of your mortgage and house values rise. This will only be an option if you don't need to move, of course. To speed things up and enable you to move sooner, you could start making overpayments on your mortgage. There is also a good chance that that house prices will recover in the future, increasing the equity you hold in the property.
  3. Boost the value of your property. If you find that the amount you're likely to raise through the sale of your property is falling just short of what you'd need to break even on your mortgage then there are several ways you can increase the value of your home without spending a small fortune. You may find that there are some enhancements that you can incorporate into your own home to add value at an acceptable cost. If you're stuck for ideas then you can always contact your estate agent for ideas.
  4. Rent out your house. If you can't sell and have no option but to move renting out your home may be an option worth considering. This would mean you'll continue to own your home and repay your mortgage using rental income while you rent somewhere else until your home comes out of negative equity and you're able to sell.
  5. Speak to your lender. Speaking to your mortgage provider about your options is a good idea regardless of which course of action you are considering - it will give you a clear idea how much you owe and if you can move the mortgage to another property. When faced with negative equity your options will largely be restricted by how flexible your mortgage provider is when it comes to letting you transfer your mortgage to a new property, re-mortgage to a different deal, or accept alternate finance options.
  6. Borrow the difference. Depending on the difference in value between your home and outstanding mortgage you could look into borrowing the money you need to clear the short fall on your mortgage and buy yourself out.
  7. Sell up anyway. If you've reached the point where you're struggling to meet your mortgage repayments but are stuck in negative equity, selling your home may be your final option. It's possible that your mortgage lender would be willing to accept the amount you'd be able to raise through the sale of your property as settlement on your mortgage - providing it's more than they'd receive if your home was repossessed.

Additional Debt Burden

All too often in addition to negative equity, but not in any way exclusive to just homeowners with negative equity, we see the added complication of dealing with unmanageable and unaffordable unsecured debts which creates a feeling of despair and piles more pressure on already stretched household finances.

Individuals fall into the debt trap for a variety of reasons, normally due to a change of circumstances within the household such as a loss or reduction of household income.

If there is no pressing requirement to move or relocate then considering one of the Scottish statutory debt solutions could be the answer to dealing with the debts allowing control of the finances to be regained and a debt free future with. This would also potentially allow time for the home value to recover.

The statutory solutions available in Scotland are as follows.

Debt Arrangement Scheme (DAS)

DAS is a government-run debt management tool which allows someone in debt to repay their debts through a debt payment program (DPP). The DPP will allow a debtor to pay off their debts over an extended period of time while giving them protection from their creditors taking action against them to recover the debt in the DPP. The DPP can last for any reasonable length of time and, if approved, will freeze all interest, fees and charges on the debts, resulting in them being written off if the debtor fully completes the DPP. The DAS ignores any assets already owned by the client including property.

Trust Deeds

A Trust Deed uses government legislation to enable people living in Scotland, who are struggling with unmanageable debts, generally £5000 or more, to manage their debts within a realistic timeframe. The duration of the repayment period is typically 48 months and you will pay an agreed monthly contribution based on your affordability, and once completed, all of your remaining debts are legally written off. This is set up as a voluntary agreement between yourself and the people that you owe money to (your creditors) and is best suited for people who have a regular income and who are able to commit to a repayment schedule which will become legally binding.

The added advantage is that once it is agreed (becomes Protected) this prevents your creditors from adding further interest and charges and also from taking any further action against you. The process, from start to finish is handled by your trustee (an insolvency practioner), who organises the paperwork , deals with the creditors on your behalf and manages the process to completion.

Sequestration (Bankruptcy)

Sequestration is the Scottish term for Bankruptcy. In 2008 the laws relating to Scottish Bankruptcy were changed allowing debtors to apply for their own bankruptcy, rather than having to wait for a creditor to do so. If you owe £1500 or more, you can apply for your personal bankruptcy. The process is similar to that of a Trust Deed and is handled by a trustee.

In both Trust Deeds and Sequestration existing assets such as your property are taken into account by your trustee (the person who administers your Trust Deed or Sequestration) and a valuation is sought prior to going ahead with the solution. If after the valuation is carried out there is little or no negative equity then your trustee will confirm in writing that they have no interest in your property and it will be unaffected by the Trust Deed or Sequestration.

Editor's Note

The general consensus is that the Scottish housing market is in recovery, but the view remains mixed at regional and local level. What a homeowner does about negative equity really depends on what is priority and what is needed as opposed to desired. A homeowner who is struggling to pay the mortgage and falling further in debt requires a different approach to someone who may be managing mortgage payments and has landed in negative equity due to the fall in house prices. One needs a more urgent solution than the other. If homeowners have free disposable income, making overpayments now to help reduce the negative equity gaps would be a very sensible course of action. Lenders may also want to be more flexible with the terms and conditions placed on mortgages, allowing customers to overpay without facing fines. Always seek advice from a professional when considering selling your home or dealing with debts.

Contact: / 0845 302 4628

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