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What is negative equity?

What is negative equity, when is it likely to happen and should I be worried that it could happen to me? Get the latest in our guide.

Words by: Nic Hopkirk

Senior Editor

Negative equity is when a property you own is worth less than the mortgage you’re paying on it.

If you bought a home for £200,000 with a 10% deposit, your mortgage would be £180,000.

If the home then becomes worth less than £180,000, the property is in negative equity.

Homes usually fall into negative equity when house prices dip substantially, for example, when there’s a property market crash.

The last time this happened was in 2007-2009, when the average house price dropped 15-20%. 

It took a few years for house prices to recover and properties began to return to their pre-crash levels in 2012.

How can I find out if I have negative equity?

1: First of all, find out the balance of your mortgage from your mortgage statements or by speaking with your lender.

2: Invite two to three local estate agents to offer a valuation on your home. You could also hire a surveyor, but bear in mind they will charge for this.

Thinking of selling?

Get the ball rolling with an in-person valuation of your home. It’s free and there’s no obligation to sell if you change your mind.

Your mortgage lender can also conduct a valuation on your property.

3: If the valuation on your home suggests it’s worth less than the mortgage you have left to pay on it, you’ll be in negative equity.

What can I do if I have negative equity?

If you’re not planning to move anytime soon and you’re only in negative equity by a small amount, try not to worry.

House prices can change quickly and you may find you move back out of negative equity fairly quickly.

Often the best thing to do is to stay put and keep paying off your mortgage.

The more you own of your property, the greater the amount of equity you have in it.

And over time, house prices tend to rise and you may find the situation rectifies itself.

If you’re worried about negative equity and you’re able to increase your mortgage payments, you could consider overpaying your mortgage. 

This will help to reduce the amount you owe more quickly and take you out of negative equity.

What can I do if I have negative equity and I want to sell my home?

Negative equity only really becomes a problem when you need to sell your home, or if you want to borrow against the value of your home.

Most mortgage lenders will allow you to sell your home and then pay off any shortfall over a period of time.

However, selling a home that’s in negative equity isn’t advisable and should really only be used as a last resort. 

It’s expensive and involves breaking your mortgage terms.

If you find you’re unable to keep up with your mortgage repayments and need to sell, then you’ll need to secure your mortgage lender’s permission to do so.

You’ll then be left with an outstanding balance which you’ll owe to your lender.

Your lender will send you a bill to make up for the shortfall and you’ll need to arrange a repayment plan with them to ensure that it’s paid back over time.

How do you pay off negative equity?

1: Contact your lender 

Some lenders have schemes available for existing borrowers to help with negative equity if you have a good payment record.

You may be allowed to borrow up to 125% of the value of your home when you move. 

Or there may be a maximum amount of debt on your old mortgage that can be included in your new mortgage. 

It’s possible that 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. 

Negative equity: what can I do if I think my lender is being unhelpful?

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2: Consider an unsecured loan

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 is usually charged, but an unsecured loan does not put your new house at risk.  

Remember that if you do decide to sell, you’ll also need to factor in the costs for estate agent fees and solicitors’ fees.

3: Wait it out

Simply continuing to pay off your mortgage will increase the amount of equity you own in your property.

And, over time, property values tend to increase, meaning the amount of equity you have in your home will increase too.

How much does it cost to sell a home?

Should I be worried about negative equity?

While house prices in some areas for some properties are currently falling slightly, the substantial property gains made during the pandemic mean that most homeowners have a good cushion to absorb any minor house price falls.

Our Executive Director - Research, Richard Donnell, says: "House prices are starting to post small falls in higher value markets where average values are over £400,000.

"In more affordable markets prices are still rising year on year, albeit at much slower rates than a year ago.

“However, there is a likelihood that surveyors will start to down-value in the face of greater uncertainty and reports of deals falling through.

“If that were to happen, there is a huge equity cushion to absorb any price falls. 

“Home prices have jumped over the pandemic, with the cost of houses in Wales increasing by 27% over the last two years.

“A nationwide 15% reduction in house prices from today’s levels would result in very few cases of negative equity for mortgaged sales up to the end of 2021.

“This highlights how the housing market has become increasingly equity driven and is much less dependent on high loan to value (LTV) borrowing over 90%.”  

We try to make sure that the information here is accurate at the time of publishing. But the property market moves fast and some information may now be out of date. Zoopla Property Group accepts no responsibility or liability for any decisions you make based on the information provided.