All about negative equity

Negative equity means the value of your home is less than the amount you owe on your mortgage. Although it is not necessarily an issue, negative equity can become a problem if you are trying to remortgage or sell your home. 

What is negative equity?

Negative equity is when the current value of your home is less than the amount you owe on your mortgage.

Case study

Ian and Jane buy a 3-bedroom house for £200,000. They put down a 5% deposit, or £10,000, up front. The mortgage they take out is therefore a 95% loan to value (LTV) of £190,000

- Within 2 years of buying the house, house prices drop by 20%

- Their home is now worth £160,000, or £40,000 less than when they bought it.

- They have paid off £10,000 of the mortgage since they bought it 

- This means their outstanding mortgage is £180,000

This home is now worth £20,000 less than their mortgage, so they are now in negative equity.

Find out more about mortgages

Am I at risk of negative equity?

If you bought your house with a small deposit, then you are more likely to have taken out a high loan to value (LTV) mortgage.

This means you are more likely to be affected, even if there is only a small fall in house prices.

House prices do fluctuate, and a house purchase is a long-term financial commitment so even if you are in negative equity, it may not affect your finances. 

How to make sure you build equity in your home and avoid negative equity

As you pay off more of your mortgage, you will find you owe less to the mortgage lender and are more likely to have expanded the amount of equity – which is the amount you own – in your home.

Taking out a repayment, rather than interest-only mortgage means you will be paying more of your mortgage and building more equity in your home. 

How do I find out if I am in negative equity?

The first thing you need to check is the value of your home.

How to check the value of your home

You can do this using an online estate agent that offers a free valuation service like Yopa or Purple Bricks.

Another option is to ask a local estate agent for a valuation, or you can use a property comparison website such as Zoopla or Rightmove to find out how much similar properties in your area are selling for.

Remember that any valuation you get will only be a guide to the value of your home.

Find out how much your outstanding mortgage balance is

Check your outstanding balance by looking at your most recent mortgage statement or contacting your lender to ask them for a balance update.

You can check the current value of your home and compare it to the amount outstanding on your mortgage. 

If your mortgage balance is more than your home's value, you are in negative equity.

Do I need to worry about being in negative equity?

How you should deal with negative equity will depend on your finances and current circumstances.

If you have just bought your house and you are a first-time buyer with no problems making your mortgage repayments, then you may not need to worry about negative equity.

What if I am in negative equity and need to sell my home?

If you need to sell your home and you owe more on your mortgage than your home is valued at then you will have to make up the difference between what you owe on your mortgage and the amount you make from the sale.

Your options if you need to sell your home and are in negative equity are:

• Getting permission from your lender to arrange the sale if the likely return is less than your outstanding mortgage

• Renting rather than selling the property which will allow you to keep paying the mortgage

You will need permission from your lender before you arrange to let out your home.

What if I am in negative equity and my mortgage deal is coming to an end?

If you are in negative equity it can be difficult to arrange a new mortgage when your current deal ends. 

Talk to your existing provider to try and re-negotiate a new deal.

If they do not offer you a new deal, you will be moved onto their standard variable rate (SVR) when your current deal ends.

If the SVR is lower, your repayments should decrease. But they could rise later because SVR deals can change at any time.

If the new rate is higher, your repayments could rise. 

If your mortgage payments become unaffordable, speak to your lender about your options. 

You can switch to an interest-only deal to make your repayments more affordable, however this is not a long-term solution. 

I am in negative equity and can't afford my mortgage repayments

If you are struggling to meet your mortgage repayments, speak to your lender right away. They may be willing to look at solutions to make your mortgage more affordable.

Keep paying whatever you can in the meantime and contact an independent advice charity like Citizens Advice for guidance.

Here are your options if you are unable to make your mortgage payments.

I am in negative equity but can afford my repayments

If you keep paying your mortgage and do not need to sell your home or move to a new house, negative equity makes little difference to your financial situation.

House prices fluctuate over time and usually increase over the long term, so it is likely your property value could rise again in the future.

How do I protect myself against negative equity?

If you are able to build up some equity in your property, this helps get you out of negative equity and protects you against further price declines. 

You can do this by continuing to pay your mortgage, or you can speed it up by making overpayments.

Check your mortgage terms and conditions carefully before you make any overpayments as there may be additional costs involved.

Can I change or extend the term of my negative equity mortgage?

You may be able to extend a current deal with your mortgage lender; you are always best to speak to your lender if you are worried about negative equity.

Can I get a mortgage deal if I am in negative equity?

It is more difficult to get a new mortgage deal and you may end up on your lender’s standard variable rate or SVR. If you can afford your repayments you may be best to continue paying or trying to overpay in order to claw back some equity in your home.

Can I roll negative equity into my mortgage?

A small number of specialist lenders will allow you to move negative equity with your mortgage but you will still need to put down a deposit.

Does mortgage interest count towards my negative equity?

Mortgage interest does not count towards your negative equity. Think of the interest you pay as being the fee for taking out the mortgage loan itself. 

Negative equity only relates to the value of your home. If you are able to keep paying your mortgage’s interest you will be able to maintain your credit rating and keep your options open if or when the value of your home increases.

How can I remortgage with negative equity?

You may be able to include a guarantor on any new mortgage but the guarantor will need to have the loan secured on their home as well as your own.  

You may be able to clear the negative equity by obtaining an unsecured loan from your bank or building society. This will be a more expensive way to borrow but will not put your new house at risk.  

A bridging loan or a second charge mortgage are other short-term options, but they will be secured on your home.

Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up repayments on your mortgage or any other debt secured on it.