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What happens if I have more secured debt than the value of my property?

If you are a homeowner, you will probably have debt secured on your property. You may have a mortgage, a debt consolidation loan or, in many cases, both. Perhaps your loans will be with the same lender or perhaps you have a main mortgage and then one or more debt consolidation loans with different lenders?

However, with house prices having fallen by almost 20 per cent since 2007, many households now have secured debt that is greater than the value of their home. The Daily Mail has reported that the average home in Britain is worth nearly £40,000 less than it was five years ago. So, if the value of your property is less than your total secured debt, what happens? We explain.

What is a secured debt consolidation loan?

A secured loan is one way to consolidate all your unsecured debts into one monthly payment.

A secured debt consolidation loan can allow you to repay unsecured debts such as credit cards, overdrafts, personal loans, store cards, catalogue accounts and hire-purchase agreements. It replaces multiple small payments with one monthly payment (alongside your mortgage). A debt consolidation loan can make it easier to manage your money every month and budget for your bills.

What is ‘negative equity’?

According to figures from HSBC, by the end of November 2011, 360,000 homes in the UK were worth less than their mortgages. This is commonly called ‘negative equity’.

Negative equity is the term used to describe your financial situation when the current value of your home is less than the amount you have outstanding on your secured debts.

For example, your may have bought your property for £150,000. You took out a £100,000 mortgage and a £20,000 debt consolidation loan. Now, thanks to falling prices, your property is only worth £100,000. You owe £120,000 on a property worth £100,000, leaving you in ‘negative equity’.

Negative equity is only a major problem if you sell your home

Many people assume that falling into negative equity will have immediate consequences or require them to do something about their debt. However, negative equity is only generally a problem is you want to sell or are forced to sell your home.

If you aren’t planning to sell, then the most obvious option for you if you are worried about negative equity is to stay put. History suggests that while property values fluctuate, they rise over the long-term. If you are in negative equity now you may find this position will change in a few years.

Dealing with negative equity

It is worth remembering that lenders won’t take any action against you simply for falling into negative equity. They cannot issue a repossession order simply because you owe more than your home is worth.

Negative equity will become a problem if you sell or are forced to sell your property. Here, you may have to sell your property but you may still owe money to one or more lenders. Often, it is possible in this situation to come to an arrangement with your lenders to sell your home and to repay any shortfall over a period of time.

You will need your lender's permission to sell your property for less than the outstanding debt and you will need somewhere to live. Your debt is not automatically written off when you sell your home. Lenders can pursue you for up to six years for any money that is left owing after you have sold the property.

If you are worried about slipping into negative equity, you can consider reducing your debt. Most mortgages or debt consolidation loans allow you to repay part of your loan without penalty. If you have saving earning a low rate of interest then it may pay to repay your debt so you owe less than the value of your home.

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