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Negative equity (Scotland)
This fact sheet covers Scotland. We also have a version for England & Wales if you need it.
This fact sheet tells you what negative equity is and your options for dealing with it.
Use this fact sheet to:
find out if there is any help you can get;
work out the best option for you; and
help negotiate with your lender.
What is negative equity?
Negative equity is the term commonly used to describe the situation of having a home that is worth less than your mortgage. There is no easy solution to the problem of negative equity. You may want a bigger house or need to move to a different area for employment reasons. The following points are suggestions of possible options to explore if you are in this situation. There may not be a suggestion that is appropriate to your circumstances.
Help from your lender
Contact your lender and ask if there are any schemes it runs to help with the negative equity. Some lenders may have packages for their existing borrowers but usually only if you have a good payment record. For example, you may be allowed to borrow more than the value of your new home when you move. There may be a maximum amount of debt on your old mortgage that can be included in your new mortgage. Also, you may have to pay off the old mortgage debt over a shorter time period than a usual mortgage such as 10 years rather than 25 years. You will need to pay solicitors’, estate agents’ fees and the cost of moving as well.
This is not necessarily a cheap option as the interest rate may be higher and there may be a fee. You are also putting your new home at risk if you cannot keep up the total mortgage payments on the new home. Payments will be larger than normal because of the shortfall having been included.
Some lenders may agree to accept less than the full amount of the shortfall debt by securing part of the debt on a new property as part of your mortgage, and writing off the rest.
Some schemes ask for a guarantor on the new loan (such as a relative) and may want the loan secured on their home as well as your own. Be very careful, the guarantor’s house would be at risk if you cannot make the payments.
You may be able to clear the negative equity by obtaining an unsecured loan from your bank or building society. This will probably be more expensive than a secured loan because a higher rate of interest may be charged, but an unsecured loan does not put your new house at risk. The loan may also be offered over a shorter period, which would mean the monthly payments are likely to be larger.
A limited number of lenders may run schemes that offer assistance to all borrowers. So you can apply even if your mortgage is with a different lender. Shop around high street banks and building societies and ask about these schemes.
Mortgage rescue scheme
The Home Owners’ Support Fund - Mortgage to Rent scheme.
There is a Scottish government mortgage rescue scheme to help you as a last resort if you are facing repossession. This is called the Mortgage to Rent scheme. Under this scheme your home is sold to a housing association or the local council, and the mortgage and any secured loans are paid off. You can stay in your home, but as a tenant rather than a homeowner. You can apply to join the scheme even if you are in negative equity.
To qualify to join the scheme you will have to fit into the rules; these include:
your home will have to be in danger of being repossessed;
your home must be worth less than a set limit for its size and the area where you live;
you have not made full payments on the mortgage or a secured loan for at least three months; and
you have total arrears equal to at least one monthly payment.
There are other rules and it is important that you get advice about your whole circumstances before deciding if this is a good option for you. Also your application to join the scheme will not be accepted unless you have taken independent advice, for example, from a Citizens Advice Bureau, a money adviser or a council money advice centre. Contact us for advice.
The Scottish Government has produced an information booklet on the Home Owners' Support Fund. You can find it at gov.scot or contact us for a copy.
Renting out your home
Another option is renting out your house with your lender’s permission. Some lenders add an extra percentage on to the mortgage interest rate for allowing you to rent out the property. You could ask them to waive this if it will cause you hardship. You also need to check if your buildings and contents insurance will be affected by renting the house out. You will need to check if your tax position will be affected.
It can be difficult to deal with renting out your house if you live far away. You may need to ask an estate agent or letting agency to act for you and find tenants. There will be a fee charged for this service. Your lender may say that you must use a specific agency and type of tenancy agreement.
It is also worth approaching local housing associations. They are sometimes willing to take over renting out your property to people on their waiting lists. For a list of housing associations in your area, ask your local council or contact The Scottish Housing Regulator. See Useful contacts later in this fact sheet.
If you rent out the house then you will have to find alternative accommodation, such as a private tenancy, or move in with relatives. This may be useful if your aim is to move to another part of the country. You may be able to help buy another property with a new lender if your income is high enough. Most lenders are likely to be reluctant to do this except in very specific circumstances.
You will still be liable for the mortgage when your tenants leave, and the rent you get may not cover the whole monthly mortgage payment. You will also be responsible for repairs to your property.
Selling your home
Help from your lender
You may be able to sell your house with permission from your lender. You will need their agreement as they can stop a sale going through if the sale price will not cover the outstanding mortgage. You will need to persuade them that you have obtained the best possible price for the property. Point out that if the house was sold by your lender they would be likely to get a much lower price as the property would be empty and would fall into disrepair.
Check if your lender has an ‘assisted sale’ scheme that can help you. Some lenders will agree to an arrangement where you stay in your home while the sale goes through. There are special rules you have to follow. Your lender may want you to use an approved estate agent for the sale, and check the offers you get from possible buyers. In return, the lender will hold action while the sale goes through. They may even agree to help with your legal fees and write off some of the shortfall. Each lender will have different rules. Contact us for advice.
The Mortgage: Conduct of Business Rules say that a lender must “deal fairly” with anyone in arrears. It also says the lender must: “give consideration to the customer being allowed to remain in possession to effect a sale”. This means that if you cannot afford to stay in the house, the lender must look seriously at allowing you to sell the house yourself whilst you are still living there.
What to do next
Talk to your lender about selling your home yourself. Ask if your lender has an ‘assisted sale’ scheme.
You may have to prove to your lender that sale is the last resort and the sale is in everyone’s financial interest.
Give your lender full information about your financial circumstances.
You will need evidence from several independent estate agents that you have found the best sale price for your home.
The lender may ask you to sign an extra agreement saying how you will repay the shortfall debt.
Consider handing the keys in and making an arrangement to clear the shortfall once the house is sold by your lender. This is only an option if you do not want a new mortgage in the near future as your details will be on credit reference agency files for six years.
You will also have a problem with being rehoused by the council as they could treat you as having made yourself homeless voluntarily.
Make sure you keep any valuations from estate agents and keep adverts for sale of similar properties in your area in case there is a dispute in the future over the price for which the lender sold the property.
You will still be liable for the regular mortgage payments until the house is sold. You will also be liable for interest charges, costs of estate agents, legal fees, repairs and insuring the building.
You will have to pay council tax if you are still living in the property. If you move out, and the property is empty and unfurnished, you may not have to pay council tax for up to six months. If you still haven’t sold the house after six months, your local authority may ask you to pay half or full council tax depending upon local rules. If you hand the keys back to your mortgage lender, you should not usually have to pay council tax but this depends upon whether your mortgage lender has properly taken possession of the property (changed the locks and so on). Contact us for advice.
You need to think very carefully about the options before handing your keys back. Contact us for advice.
Mortgage indemnity insurance
Get legal advice about the terms of any mortgage indemnity insurance policy you may have on the mortgage. There have been arguments put forward that the policy which you pay for should cover you in the event of a shortfall, rather than your lender. Following a court of appeal decision on this issue, it appears that this argument is very unlikely to succeed. You could ask for details of the policy from your lender and see if the terms could be interpreted as covering you as well as your lender.
Other options
Borrow the amount needed to clear the shortfall from another source such as a personal loan, savings or from a friend or relative.
If you have an endowment mortgage you could check with an independent financial adviser to see if the value of the endowment could be off-set against the negative equity.
If you have the money, you could increase your payments on an endowment policy or other investment scheme to build up enough cover to pay off the negative equity when the house is sold.
You could check the surrender terms of any investment you already have. Have any policy valued both by the insurance company and second-hand policy brokers.
If you have an endowment mortgage it may be worth discussing with your lender the implications of swapping to a repayment mortgage. The advantage of doing this is that with a repayment mortgage you would be paying part-capital and part-interest every month. This would mean you actually reduce the balance you owe on the mortgage over time and therefore reduce your negative equity.
It is also possible with a repayment mortgage to make extra lump-sum payments towards the mortgage, which reduce the balance owing. You have to be careful that the lender accepts the payments off the capital and not just as advance payments off your monthly instalments. Check this with your lender, or contact us for advice.
If you want to move because you need more space, look at whether you can convert your loft or build an extension. In this way you may be able to stay in your house until house prices improve.
Brokers should be registered with the Financial Ombudsman Service (FOS). See Useful contacts at the end of this fact sheet for details of the Association of Policy Market Makers.
Independent financial advice
For a list of independent financial advisers in your area, you could contact MoneyHelper. See Useful contacts at the end of this fact sheet.
Be very careful to get independent financial advice when considering changing from an endowment to a repayment mortgage. You may lose out on payments you have made on your endowment if you surrender the policy early on, as it may not be worth as much as you have paid in.
What can I do if my lender is unhelpful?
The Financial Conduct Authority (FCA) regulates mortgages taken out since 31 October 2004 and also deals with problems with existing mortgages. This applies to all mortgages where the lender has a first charge over the property and at least 40% of the property is occupied by you and/or your immediate family. It does not apply to secured loans regulated by the Consumer Credit Act 1974.
If your secured loan is taken out under the Consumer Credit Act 1974, then the FCA will not regulate the loan. However they do deal with licensing lenders under the Consumer Credit Act and will investigate the lender’s fitness to hold a licence when things go wrong. You can still take up your complaint with the Financial Ombudsman Service.
If your lender is unhelpful you should first complain to your lender in writing. If you are not happy with their response you can complain to the Financial Ombudsman Service. The Financial Ombudsman Service will look at whether your lender treated you fairly and acted reasonably when dealing with your situation. For example, they may look at whether your lender agreed to let you stay in your home and sell the property yourself. They may also look at situations where your lender has refused permission for you to sell the property for less than the mortgage, but then gone on to sell the house themselves for a lot less after repossession.
Useful contacts
Association of Policy Market Makers Ltd Phone: 0845 643 5849 www.apmm.org
Financial Conduct Authority Phone: 0800 111 6768 Email: consumer.queries@fca.org.uk www.fca.org.uk
Financial Ombudsman Service
Phone: 0800 023 4567
Email: complaint.info@financial-ombudsman.org.uk
www.financial-ombudsman.org.uk
MoneyHelper Phone: 0800 138 7777 www.moneyhelper.org.uk
The Scottish Housing Regulator
Phone: 0141 242 5642
Email: shr@scottishhousingregulator.gsi.gov.uk
www.scottishhousingregulator.gov.uk
Other fact sheets that may help you
Advice if you are worried about losing your home