What is negative equity?
If your property value falls below the outstanding balance of your mortgage, you'll find yourself in negative equity. In this guide we look at what negative equity is, how to best avoid it and how to get out of it if you find yourself in that position.
A quick summary on negative equity
Negative equity is when you owe more on your mortgage than your home is currently worth. This is most likely to happen if property prices fall after you've taken out a mortgage.
What is equity?
Equity is the percentage of your home that you own. Your initial equity comes from your mortgage deposit, so a larger deposit immediately gives you more equity from the get-go which can reduce your chances of falling into negative equity.
Equity is built up in two main ways:
By repaying your mortgage over time, which reduces your loan amount
When your property value rises
This is slightly different if you have an interest-only mortgage, in which case you only gain equity with a rise in property value, as your monthly mortgage payments are not reducing the original loan amount.
If there is a fall in your property value, you’ll lose equity, even though you’re still repaying the loan. If your property value falls below the outstanding balance on your mortgage, you’ll enter negative equity.
Here's an example of negative equity
You buy a home worth £200,000 with a 5% deposit (£10,000)
Your mortgage is for £190,000 (a 95% LTV) so you have 5% equity
The property market falls and your home's value drops to £180,000
You are now in negative equity. You owe £190,000 on a home that is only worth £180,000, meaning you owe £10,000 more than your home is worth
How does negative equity happen?
The most common reason for falling into negative equity is a fall in property prices. Though property prices tend to rise over time, rather than fall, it’s certainly a possibility and more likely to happen when the country is in a recession, as this is when property values tend to fall the furthest.
It's also easier to fall into negative equity if:
You used a small deposit - or no deposit - to buy your home
You have an interest-only mortgage
You leave your house to fall into disrepair, meaning it will lose value more easily
You’re in arrears on a repayment mortgage
How to find out whether you’re in negative equity
It’s fairly easy to find out whether you’re in negative equity or not:
Check your outstanding mortgage balance. You'll find this on your latest statement or by contacting your lender to find out exactly what you owe
Get an up-to-date property valuation. You could ask local estate agents for a good estimate or, for a formal valuation, ask an independent surveyor.
Compare the figures. Subtract your outstanding mortgage balance from your property's current value. If the result is a negative number, you are in negative equity.
Get free mortgage advice
Our broker partner, Mojo Mortgages, can help you compare your mortgage options and provide personalised recommendations.
How to reduce your negative equity
If you have no plans to move or remortgage, being in negative equity for a short time shouldn’t cause too much of an issue. But if you're looking to improve your position, there are several steps you can take to reduce your negative equity.
Overpay your mortgage. If you can afford it, try to make mortgage overpayments to reduce your mortgage balance and build your equity. Always check your lender's overpayment allowance to avoid potential penalty charges, though.
Consider a repayment mortgage. If you’re on an interest-only mortgage, you're not paying off any of the original borrowing amount. You may wish to ask your lender if you can switch mortgages to a repayment plan, where each payment reduces your debt and increases your equity.
Wait for property prices to rise. This allows your home's value to recover naturally over time - however, waiting may not always be possible if you need to move or remortgage soon.
Add value to your home. Renovations and improvements can increase your property's market value. Be cautious about the return on investment, though, and the risks involved if you need to borrow more to fund the improvements.
Tips to help first-time buyers avoid negative equity
As a first-time buyer, you can significantly reduce your risk of falling into negative equity by making strategic decisions before you buy a home.
Put down a larger deposit. The larger your deposit, the more equity you own from day one and the lower your loan-to-value (LTV) will be. This means property prices would have to fall significantly before your outstanding mortgage balance becomes larger than your home's value.
Don't overpay for the property. Before making an offer, research recent sale prices of similar homes in the nearby area to make sure you’re getting the property at market value.
Monitor the housing market. Try to be aware of the current property market. Buying a home when prices are inflated increases your risk of negative equity.
Think carefully before buying a new build. You'll often pay a premium when buying a brand new home, so it might be harder to get the same price for it if you plan to sell within a few years.
Consider a repayment mortgage. With a repayment mortgage, you reduce your total loan amount with every monthly payment whereas with an interest-only product you’re not gaining any equity unless the property price goes up.
What are negative equity mortgages?
Negative equity mortgages are a type of specialist mortgage that allows you to transfer your negative equity to a new home. Essentially, it allows you to sell your current property for less than the mortgage you owe on it - and then you'll add the remaining debt onto the mortgage for your new home.
Negative equity mortgages are only offered by a handful of lenders, but it’s a possibility if you’re in negative equity and desperate to move home. It's worth speaking to a qualified broker to discuss your options and make sure this kind of mortgage product is right for you.
Pros and cons of negative equity mortgages
You can move house without having to repay the negative equity, as it’s transferred to the new property
The interest rates may be high to balance the increased risk to the lender
If you’re in a fixed-rate deal or within the introductory period of a variable-rate deal, you’re likely to have to pay early repayment charges (ERCs) to leave your existing mortgage early
Negative equity mortgages are hard to find as not many lenders offer them
Can I remortgage when in negative equity?
You won’t usually be able to remortgage if you’re in negative equity, but there may be some lenders willing to do a product transfer.
Do keep in mind, though, that even if you can find a product transfer with your existing lender, they won't necessarily have a cheaper rate available. However, opting for a product transfer could still help you to avoid being automatically moved onto your lender's standard variable rate.
It may be worth consulting a qualified broker like our partner, Mojo Mortgages, to discuss your remortgage options.
Can I remortgage to borrow more money when in negative equity?
If you’re looking to remortgage to borrow more money, you won’t be able to do this in negative equity. This is because your equity is used as a deposit for additional borrowing.
It’s also important to understand that, even when you’re not in negative equity, if you remortgage to borrow more, you’ll have a greater chance of falling into negative equity in the future. This is because you’re reducing the equity you hold by increasing the loan.
What if I can’t make my mortgage payments?
It’s important to continue paying whatever you can afford if you're unable to make full mortgage repayments, as this will minimise the debt you accumulate.
If you're struggling to keep up with your mortgage payments, get in touch with your lender as soon as possible. Most lenders will be keen to help customers continue repaying their mortgage, and will be able to offer recommendations on how to cope when you can’t afford your mortgage repayments.
There are also a number of debt charities that may be able to help you:
Negative equity FAQs
Can I sell my home when it’s in negative equity?
You may be able to sell your home while in negative equity, but it won't solve the underlying problem.
If your property value has fallen, the sale price will be lower than your outstanding mortgage balance. So you’ll still owe whatever mortgage you took out to buy the property at a higher price (minus any repayments you've made).
This means that you would need to repay the remaining debt to your lender even after you’ve sold the property. One option is to pay the entire amount as a lump sum after the sale but, if this isn't possible, your lenders may allow you to set up a payment plan to settle the remaining debt.
You may also need to seek your lender's permission before you are able to sell a house with negative equity. And, because you're still managing the shortfall from your last home, securing a mortgage to buy a new property at the same time is usually not feasable.
Can I move house if I'm in negative equity?
It can be difficult to move home if you’re in negative equity, unless you’re able to repay the difference. However, there are a few negative equity mortgages available (these are often offered at high interest rates and are fairly hard to come by).
Will being in negative equity affect my credit rating?
The good news is, so long as you continue to make mortgage repayments, being in negative equity will not directly affect your credit score.
You’re still repaying the agreed debt, so from the credit reference agency’s perspective, there isn’t an issue.
YOUR HOME/PROPERTY MAY BE REPOSSESSED IF YOU DO NOT KEEP UP WITH YOUR MORTGAGE REPAYMENTS.
The FCA does not regulate mortgages on commercial or investment buy-to-let properties.
Uswitch makes introductions to Mojo Mortgages to provide mortgage solutions.
Uswitch and Mojo Mortgages are part of the same group of companies. Uswitch Limited is authorised and regulated by the Financial Conduct Authority (FCA) under firm reference number 312850. You can check this on the Financial Services Register by visiting the FCA website.
Uswitch Limited is registered in England and Wales (Company No 03612689) The Cooperage, 5 Copper Row, London SE1 2LH.
Mojo Mortgages is a trading style of Life's Great Limited which is registered in England and Wales (06246376). Mojo are authorised and regulated by the Financial Conduct Authority and are on the Financial Services Register (478215)
Mojo’s registered office is The Cooperage, 5 Copper Row, London, SE1 2LH. To contact Mojo by phone, please call 0333 123 0012.