Imagine owning a home worth less than the mortgage you owe on it. That’s negative equity – and it’s a situation that catches more homeowners off guard than you might think.
Whether you’re a first-time buyer worried about market fluctuations or a homeowner considering remortgaging, understanding negative equity is crucial. This guide explains what negative equity means, why it happens, how it affects your mortgage options, and most importantly, what practical steps you can take if you find yourself in this position.
The good news? Negative equity isn’t permanent, and there are strategies to manage or reduce it. Let’s explore everything you need to know about this important property finance concept.
Understanding Negative Equity
Equity is the portion of your property you actually own—the difference between your home’s current market value and your outstanding mortgage balance.
For example:
- Your property is worth £250,000
- Your mortgage balance is £220,000
- Your equity = £30,000
Negative equity occurs when this calculation reverses—when you owe more on your mortgage than your property is worth.
Using the same example, if your property value dropped to £200,000 but your mortgage remained at £220,000, you’d have £20,000 in negative equity.
Why Negative Equity Happens
Several factors can push homeowners into negative equity:
House price falls: Economic downturns, local market changes, or oversupply in your area can reduce property values. The 2008 financial crisis left many homeowners in negative equity when house prices plummeted.
Small deposits: If you bought with a 5% or 10% deposit, even modest house price reductions can quickly eliminate your equity cushion.
Interest-only mortgages: With these mortgages, you only pay interest each month—your loan balance never decreases unless house prices rise. This significantly increases negative equity risk.
High loan-to-value (LTV) mortgages: Borrowing 90-95% of your property’s value leaves minimal equity buffer. According to UK Finance, approximately half a million UK homes have experienced negative equity during significant market downturns.
Looking to understand your financing options better? Whether you’re concerned about negative equity or exploring luxury property investments, having expert guidance makes all the difference. Contact paul.welch@millionplus.com for comprehensive property finance advice.
How to Check If You’re in Negative Equity
Determining whether you’re in negative equity requires two pieces of information: your current mortgage balance and your property’s current market value.
Step-by-Step Check
Review your mortgage statement: Your lender sends these annually (or you can access them online). This shows your outstanding mortgage balance.
Estimate your property value: Check recent sale prices for similar properties in your area on Rightmove, Zoopla, or the HM Land Registry Price Paid Data. Look for comparable properties—same size, type, condition, and location.
Calculate your equity position: Subtract your mortgage balance from your estimated property value. If the result is negative, you’re in negative equity.
Getting Professional Valuation
For accuracy, consider a professional valuation from a RICS-qualified surveyor. Lenders typically use automated valuation models or House Price Index data, which might differ from actual market value. A professional survey provides definitive figures if you’re making important financial decisions.
What to Do If You’re in Negative Equity
Discovering you’re in negative equity can be unsettling, but you have options depending on your circumstances.
If You’re Remortgaging
Negative equity makes switching lenders extremely difficult—no lender wants to provide a loan worth more than the security (your property).
Product transfers offer the best solution. Your current lender may allow you to switch to a new mortgage deal without reassessing your property value. This keeps you off the standard variable rate (SVR), which is typically much higher than fixed or tracker rates.
Important timing: Speak to your lender up to six months before your current deal ends. Product transfers often match or beat rates available to new customers, and you avoid valuation fees and legal costs.
Need help navigating mortgage options? Our team can connect you with the right solutions. For comprehensive financing guidance, reach out to paul.welch@millionplus.com.
If You’re Selling Your Property
Selling in negative equity means you can’t fully repay your mortgage from sale proceeds—you must cover the shortfall from savings or other sources.
If possible, don’t sell. Staying put allows you to continue paying down your mortgage while waiting for property values to recover. Market cycles typically correct over time.
Bridge the gap: If you must sell, calculate the shortfall and identify how you’ll cover it. Some lenders may allow you to add the shortfall to your new mortgage (negative equity mortgages), though these are rare.
Seek advice: If selling would leave you with debts you can’t repay, contact free debt advice services like Citizens Advice or StepChange before proceeding.
If You Need to Move Home
Sometimes life circumstances—job relocation, growing family, relationship breakdown—require moving despite negative equity.
Several factors affect whether you can move:
Size of shortfall: Smaller shortfalls (under £10,000-£15,000) are more manageable than larger ones.
New deposit availability: Can you put down a deposit on your next property while covering the shortfall?
Payment history: Lenders view borrowers with perfect payment records more favourably.
Always speak to your lender early. They may offer solutions you haven’t considered, and early communication prevents your situation worsening.
Negative Equity Mortgages
Negative equity mortgages allow you to transfer your negative equity to a new property purchase. You effectively borrow more than your new property’s value to cover both the new purchase and your shortfall.
Availability: These mortgages are rare and typically only offered by your existing lender. They became more common after the 2008 crisis but remain specialist products.
Pros: You can move without immediately clearing your shortfall.
Cons: Higher interest rates, larger monthly payments, significant early repayment charges, and you start with negative equity in your new home.
Reducing Your Negative Equity
The most effective way out of negative equity is reducing your mortgage balance faster than property values are falling—or waiting for house prices to recover.
Mortgage Overpayments
Most lenders allow overpayments up to 10% of your outstanding balance annually without penalties. Even modest additional payments significantly reduce your mortgage balance over time.
Use an overpayment calculator: Tools from MoneySavingExpert show exactly how extra payments reduce your balance and total interest paid.
Budget carefully: Create a detailed budget using a money planner to identify funds available for overpayments without straining your finances.
Check your mortgage terms: Some mortgages restrict overpayments or charge penalties. Review your mortgage deed or contact your lender to confirm.
Renting Out Your Home
If you must move but can’t sell, renting your property might provide income to maintain mortgage payments while waiting for values to recover.
Consent to Let: You need your lender’s permission before renting. Most lenders charge arrangement fees (typically £50-£200) and may increase your interest rate slightly.
Responsibilities: You must inform your insurer, comply with landlord regulations, manage vacant periods, and handle maintenance issues.
Tax implications: Rental income is taxable, and recent tax changes have made buy-to-let less attractive. Consult an accountant before proceeding.
Understanding complex property financing scenarios requires specialist knowledge. For guidance on optimizing your property portfolio or managing challenging mortgage situations, contact paul.welch@millionplus.com.
How to Prepare for Interest Rate Rises
Rising interest rates increase mortgage payments, making negative equity more problematic if you’re already stretching financially.
Stress-test your budget: Calculate what your payments would be if rates increased by 2-3%. Can you still afford them comfortably?
Build an emergency fund: Aim for 3-6 months of mortgage payments in accessible savings.
Consider fixing your rate: If you’re on a variable rate, switching to a fixed-rate mortgage provides payment certainty and protection against rate rises.
Review your spending: Identify areas to reduce expenses now, creating financial breathing room for potential future rate increases.
For detailed strategies on preparing for rate changes, explore our comprehensive guides on mortgage management and refinancing.
What to Do If You’re Struggling With Mortgage Payments
If negative equity coincides with payment difficulties, act immediately. Ignoring the problem makes everything worse.
Contact your lender immediately: Lenders have teams dedicated to helping borrowers in difficulty. They can discuss payment holidays, reduced payments, term extensions, or switching to interest-only temporarily.
Make partial payments: If you can’t pay the full amount, pay what you can. This demonstrates good faith and prevents your account falling as far into arrears.
Seek free debt advice: Contact Citizens Advice, StepChange, or the Debt Support Trust. These charities provide free, impartial guidance on managing debts and negotiating with lenders.
Understand the risks: Persistent arrears can lead to repossession proceedings. Early communication with your lender significantly reduces this risk.
Frequently Asked Questions
Does negative equity affect my credit score?
Negative equity itself doesn’t affect your credit score—it’s simply a calculation of property value versus mortgage debt. However, if negative equity causes you to miss mortgage payments, those missed payments will damage your credit rating.
Can I remortgage if I’m in negative equity?
Switching lenders is virtually impossible in negative equity. However, your current lender may offer a product transfer, allowing you to move to a new mortgage deal without reassessing your property’s value.
Will house prices going up fix negative equity?
Yes, if property values rise above your mortgage balance, you’re no longer in negative equity. UK house prices have historically increased over long periods, though short-term fluctuations are common.
What happens if I can’t sell my house in negative equity?
If you must sell but can’t cover the shortfall, options include negotiating with your lender to add the debt to your next mortgage, using savings to bridge the gap, or in severe cases, seeking debt advice about potential arrangements with creditors.
How long does it take to recover from negative equity?
This varies dramatically based on market conditions and your mortgage payments. With consistent overpayments and stable or rising house prices, you might exit negative equity within 2-5 years. In challenging markets with falling prices, it may take longer.
Conclusion: Managing Negative Equity Successfully
Negative equity can feel overwhelming, but it’s important to remember it’s usually temporary. UK property values have historically recovered from downturns, and consistent mortgage payments gradually reduce your loan balance.
The key is taking action early. Whether you’re remortgaging, considering selling, or worried about future interest rate rises, speak to your lender and seek professional advice before making major decisions.
Understanding your equity position, exploring all available options, and maintaining open communication with your lender helps you navigate this challenging situation successfully.
