What is negative equity?

schedule 2 min read

Negative equity is when the value of your home is less than the outstanding balance on the mortgage. For example, if you bought a property for £200,000 with a mortgage of the same amount, and the property's market value then drops to £180,000, you will have £20,000 in negative equity.

Negative equity can be a worry when you want to sell your home or if you want to remortgage.

So, what are your options?

1. Stay put

If you can, stay in your home and slowly pay off your mortgage. Over a few years house prices might rise, and you may find yourself in positive equity. Negative equity only becomes a problem when you sell your home, or if you want to borrow against your home. So, if you can, sit it out.

2. Reduce your mortgage debt

If you have savings that you can use to pay off some of your mortgage or if you can afford to increase your monthly payments, you could reduce the time you are in negative equity. However, it’s worth checking the terms of your mortgage to make sure you can make overpayments without incurring early repayment charges (ERCs).

How to avoid negative equity

Negative equity happens when house prices fall which can be caused by many factors out of your control. There are a few things you can do to try and avoid it:

• The bigger your deposit, the less likely you will fall into negative equity. If you took out a 95% mortgage or 100% mortgage it means you have little equity in the property. See our savings tips for a house deposit to find out how to boost your deposit.
• Make sure you don’t overpay for the property you buy. Look at similar properties in the area and try to negotiate and make an offer.
• Do your research on the area where the house is located. Are there any reasons that might impact the price in the future? Things like whether the area is in a long-term economic slowdown, or what else is being built in the area. Check as much as you can.
• Check whether the property has suffered from problems which have reduced its value, such as subsidence open_in_new or flooding.

If you have any worries or concerns about negative equity or keeping up with repayments its important you contact us as early as possible, and we’ll see how we can help.