What happens if you’re in negative equity?

At a glance

• Negative equity is when you owe more to your mortgage lender than the property is worth.
• This can be more of a risk with high loan-to-value mortgages and/or when property prices are falling.
• Being in negative equity is normally only a problem if you need to sell your home or remortgage – often waiting it out means house prices will rise enough to bring you back into equity.

What is equity in a home?

The amount of equity in a home is the amount you own without a mortgage. To work this out you’ll need to know the current value of the house and the amount of debt secured on it; the difference between those two figures is your equity.

EXAMPLE

Let’s say you have a house worth £220,000 and a mortgage of £200,000

£220,000 - £200,000 = £20,000

The £20,000 is your equity.

What is negative equity?

Negative equity is where your home is worth less than the mortgage secured on it. This may not matter too much if you’ve got no intention of selling your home, but if you were hoping to move or even remortgage, the sale of the property wouldn’t pay off your current mortgage and you’d still owe money to your lender.

EXAMPLE

Let’s start with the same example as above – you buy a property for £220,000 using a £20,000 deposit, giving you a mortgage of £200,000. Two years later you want to move home, but house prices have dropped, and your property is now worth £180,000. You’ve only paid off £10,000 of the mortgage in that time, and so you still owe your lender £190,000. This means you’re in negative equity of £10,000.

Property value = £180,000

Mortgage balance = £190,000

Equity = -£10,000

Negative equity doesn’t just impact mortgages – it can also be an issue with car finance, where you owe more on the vehicle than it’s currently worth. This can be a particular issue with brand new cars where depreciation sets in almost instantly. Again, it isn’t likely to be an issue unless you need to sell the car, but it can be if the vehicle is written off or stolen and the insurance payout wouldn’t cover the amount you owe to the finance provider. This is where gap insurance can come in.

Reasons for negative equity

There are a number of reasons that you may end up with negative equity on your home, including:

• Falling house prices, such as during a property market crash or if something were to impact the market at a local level (such as if a new road or development made your area less desirable)
• You paid more than market value for the property and/or bought when prices were at their peak
• You have a high loan-to-value (LTV) mortgage, which means you’re at greater risk of negative equity as even small house price changes can have a big impact.

What happens if you have negative equity?

If you’ve realised that you’re in negative equity, what can you do?

First things first – don’t panic. Property prices will always fluctuate, and although they typically move upwards, there’s always the chance that they can decline. Yet, even if that’s the case and you find you’re in negative equity, you may naturally get out of it as long as you continue to make the necessary repayments.

If you’re not planning on moving or remortgaging in the near future, your best option is to simply continue as normal. Either property prices will rise or you’ll pay off enough of your mortgage to bring your LTV back down, building up your equity once again. You may even want to overpay your mortgage if you can, which will bring down the balance quicker and therefore bring you back into equity sooner.

Another option could be making improvements to your home that will increase the value, but the risk is that you could end up in more debt, and it may have been more prudent to simply use any spare cash to overpay your mortgage. Yet it might be worth speaking to a broker or even an estate agent who’ll be able to value your property as it is now and provide an estimate as to the value once the works are complete, to see if it’ll be worthwhile.

One option that certainly won’t suit everyone is renting out your home while you move in with friends or family, allowing you to use the rental income and any extra money you’ll save to pay off your mortgage. However, not all mortgage lenders will allow you to switch to a buy-to-let deal so you’ll need to check, and you’ll also need to check for any home insurance implications.

Yet the most important thing you can do is seek advice, either from your lender, a broker or even a charity, to see what your options are.

Will negative equity affect my credit score?

No, being in negative equity itself won’t affect your credit score; it’s only if you miss payments or default on your mortgage that your rating will be impacted. Find out more about the things that will affect your score.

Can you sell your house if you’re in negative equity?

Yes, but it can depend on the lender and your individual circumstances. Selling may not even be the best option – it will be expensive and won’t clear the mortgage debt so you’ll still have an outstanding amount to repay, and you also won’t have any equity with which to buy a new property and secure a new mortgage.

If you do decide to sell and perhaps move in with friends or family, you’ll need to seek permission from your lender. They may also want to review any offers than come in and, after the property is sold, they’ll give you a payment plan to make up the shortfall.

Can you get a mortgage with negative equity?

It can be difficult, but not impossible, to get a mortgage with negative equity if you want to move home.

Some lenders will allow you to port your current mortgage deal with the negative equity portion included, essentially allowing you to borrow more than the value of your property. Yet these negative equity mortgages are rare and can come with a lot of additional terms as well as strict criteria; make sure to speak to your lender to see if it’s an option, and seek advice from a broker if you need to look elsewhere.

Can you remortgage in negative equity?

Again, this may be possible but could be difficult. Negative equity can make a lot of borrowers “mortgage prisoners”, whereby they’re stuck in expensive mortgage deals but are unable to remortgage elsewhere. This is because not all lenders will let you switch rates if you’re in negative equity and may instead put you on their standard variable rate (SVR), and other lenders may not be willing to take on your debt.

Some lenders can be more flexible and will allow you to remortgage, but there’ll likely be a lot of terms that come with that and you’ll be expected to have a good payment record. Always speak to your current lender if you’re unsure, and again, contact a broker if you need additional support.

How to minimise the chances of negative equity

There are a few things you can do to minimise the chances of falling into negative equity. These include:

• Thoroughly research house prices before you make your offer, and don’t be tempted to go above market value.
• Put down as big a deposit as you can – the lower the LTV, the less chance of falling into negative equity.
• Opt for a repayment mortgage rather than an interest-only deal. This ensures you’re always paying off the mortgage balance.
• If you’re worried about falling into negative equity, see if you can make any home improvements to increase the value. This could be a particularly good tactic if you’re a first-time buyer with a high LTV, and have bought a relatively cheap house that needs work doing to it.

What if I’m in negative equity and can’t afford my mortgage?

Things can be come trickier if you can’t afford to make your mortgage repayments when you’re in negative equity. If your account was in good standing it’d be easier to remortgage to a new deal, perhaps one with a longer term to reduce your monthly repayments, or you could downsize easily to reduce your mortgage balance and your repayments.

But if you’re in negative equity both of these things can be more difficult. Providers will be less likely to offer you a remortgage deal, and it’s unlikely the repayments would be any cheaper. Meanwhile, downsizing may not even be enough to repay the original mortgage balance and leave you with sufficient money left over to buy a new property.

If you’re really struggling there’s the chance that your property could end up being repossessed by the lender, which could put you in even greater difficulty as repossessed sales tend to be below market value, so you could potentially owe your mortgage company even more. Always try all other avenues open to you beforehand – speak to your lender as soon as possible to see if they can help, and reach out to a debt charity for impartial advice.

Need more help?

If you’re in negative equity and are struggling to know what to do next, consider contacting one of these charities:

• Citizens Advice Bureau
• StepChange
• National Debtline

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