Falling into negative equity means your outstanding mortgage balance exceeds the current market value of your property. This often puts you into a difficult financial position, and many people seek to remortgage to make things more comfortable. However, remortgaging under these circumstances can be difficult, and it is important to address the equity gap and the resulting mortgage shortfall debt before you move ahead.

The reason this is so difficult is that having negative equity means that your property does not hold enough value to secure your current borrowing. Your outstanding mortgage exceeds the price your house would achieve on the open market, which would lead to a mortgage shortfall. This shortfall is the exact sum left over when a property is sold, repossessed or remortgaged and the funds generated do not cover the full borrowing amount. It means that you will owe money beyond what the value of the property can cover, and this will affect your ability to switch to a new deal or move home.

Here, the expert remortgage solicitors at JMW explain what happens when you want to remortgage with negative equity, how the remortgage process differs in these cases and how a solicitor can help to make the process of restructuring your financial situation as smooth as possible.

Is it Worth Leaving My Current Mortgage with Negative Equity?

A mortgage shortfall occurs when the value of a property decreases after you purchase it. It means that if you decide to remortgage the property and secure a new mortgage to pay off your current lender, the new loan will not cover the full balance. The new lender will only offer a loan based on the current market value, leaving a remaining balance for you to cover from your own income or savings.

Most lenders enforce strict loan-to-value limits on new applications by capping their lending at a set percentage of the property value. This means that a new lender will typically not bridge the gap, even if an application is accepted. In most cases, the extra money that makes up the remaining balance must be paid upfront.

This means that remortgaging to release equity from your property is not possible in these circumstances. However, it may still be worthwhile to remortgage at the end of a fixed term, even with a mortgage shortfall to pay off before the application can be accepted. When your fixed term expires, remaining with your current provider usually means moving to their standard variable rate. This rate is usually significantly higher and will increase monthly payments sharply. As such, remortgaging even when you have negative equity may be advisable provided you can pay off the outstanding balance, as it will reduce the interest added and result in you paying back much less over time.

Can I Start the Remortgage Process With a Shortfall?

The remortgaging process will depend on whether you intend to switch to a new mortgage lender, or stay with your current mortgage company. In many cases, the latter offers flexibility without the need to immediately cover a mortgage shortfall, while the former gives you more options in terms of restructuring payments. Most mortgage offers last for up to six months, which means that you can start looking for new deals up to six months before the completion date when you wish your remortgage to take place.

Standard providers generally do not cover valuation gaps, but it may be possible to secure a new deal with a specialist company that offers high-LTV products. LTV is your loan-to-value ratio, which is used by mortgage providers to determine how much you can borrow and is calculated by dividing the value of your property by how much you borrowed (or are looking to borrow) with your mortgage. If you have borrowed more than your property is worth, this will lead to a very high LTV. However, there are specialist lenders who may be able to offer remortgage products that will suit your specific financial profile.

Another option is to pay the remaining balance in cash before completing the process. A solicitor can advise you on whether it is better to pay off your mortgage debt with overpayments and secure more equity in this way, or to remortgage and pay off the shortfall, if you have the funds to do so. Before doing so, you should obtain an accurate valuation from local estate agents. This will provide essential insight into the property's true market value and include exact figures that can enable you to calculate your shortfall debt accurately.

Making overpayments directly reduces the principal loan. Most financial institutions permit up to 10 per cent per year without penalty fees, which will shrink the outstanding deficit and increase your equity relative to the lower value of the property. Consistent overpayments in this way can bring the property into positive equity faster and enable a successful remortgage at better market rates. If you can continue to make these higher payments, you may be able to secure a mortgage over a shorter term and reduce how much interest you must pay. Prioritising spare funds toward the mortgage is vital as it mitigates repossession risks, which may otherwise arise in extreme cases.

Is a Remortgage the Only Option?

Your options in the case of negative equity depend on the specific circumstances of your situation. In the worst cases, homeowners can become trapped with their current lender when negative equity prevents switching companies, as a new mortgage provider generally will not accept the risk without a large cash injection.

However, active management of outstanding borrowing improves your position. Making overpayments reduces the balance over time, which may eventually bring the property out of negative equity and open up options with new lenders.

An internal product transfer with your current lender may also be a viable option. Many lenders allow existing borrowers to switch to a new fixed rate without a full affordability check or new valuation. Similarly, requesting an extended mortgage term can spread the outstanding debt over a longer period, reduce monthly instalments and enable you to manage payments. The additional flexibility this provides may enable you to reduce your mortgage shortfall by overpaying or saving towards a remortgage.

Are There Time Limits for When a Mortgage Shortfall Debt Must Be Paid?

The Limitation Act gives lenders 12 years to pursue owed capital, generally starting from the date of the first major default. This applies to the principal loan amount of the deficit. A separate six-year limit applies when you owe interest. A solicitor can analyse this split timeframe to establish the exact enforceable amount and advise you on the options available to you.

With this said, acknowledging the debt in writing or making a payment restarts the statutory clock to zero. As such, it is vital to establish the legal standing of the claim before contacting the lender or making a transfer, so as not to inadvertently reset the time limit. If a letter arrives after many years, avoid immediate admission or payment until the legal standing is verified by a solicitor as, if the relevant time limits have expired, we may be able to draft a robust response that halts the pursuit of funds.