What is negative equity?

Negative equity is the term used to describe your financial situation when the current value of your home is less than the amount you have outstanding on your mortgage.

For example, if you bought a house for 200,000, a 95% interest only mortgage would be for 190,000.

If house prices dropped by 20% after you bought your house, it would then be worth 160,000 (i.e. 40,000 less than when you originally bought it).

The value of your house would be 160,000, but your mortgage balance would still be 190,000. You would be in negative equity because you would owe the bank more than you would get if you sold your property.

Who does it affect?

If you bought your house at the top of the market with a high loan to value (LTV) mortgage (e.g. 90% or more), you could be affected.

This is because the value of your home may now be less than the amount you originally borrowed.

How to find out if you are in negative equity

Check the current value of your home and compare it to the amount outstanding on your mortgage. If your mortgage balance is more than your home's value, you are in negative equity.

  • Check your property's value by using an online estate agent that offers a free valuation service like eMoov, asking local estate agents for a valuation, or looking at how much similar properties in your area sold for.

  • Check your outstanding balance by looking at your most recent mortgage statement or contacting your lender to ask them for a balance update.

What should you do?

How you should deal with negative equity depends on your finances and current circumstances:

You're in negative equity and need to sell

If you need to sell your home, you are responsible for making up the difference between what you owe on your mortgage and the amount you make from the sale.

Your lender has to give their permission for you to arrange the sale if the likely return is less than your outstanding mortgage.

If you are unable to continue living in your property but can't sell up, letting out your house could be an option. However, you have to run this past your lender before arranging anything.

You're in negative equity and your mortgage deal is coming to an end

If you are in negative equity it can be difficult to arrange a new mortgage when your current deal ends. Talk to your existing provider to try and re-negotiate a new deal.

If they do not offer you a new deal, you will be moved onto their standard variable rate (SVR) when your current deal ends.

How this affects your finances will depend on whether the SVR is higher or lower than the rate of interest you're currently tied to as part of your deal.

  • If the new rate is lower, your repayments should decrease. But they could rise later because SVR deals can chnage at any time.

  • If the new rate is higher, your repayments could rise. If your mortgage payments become unaffordable, speak to your lender about your options.

You're in negative equity and can't afford the repayments

If you're struggling to meet your mortgage repayments, speak to your lender right away. They may be willing to look at solutions to make your mortgage more affordable.

Keep paying whatever you can in the meantime and contact an independent advice charity like Citizens Advice for guidance.

Here are your options if you are unable to make your mortgage payments.

You're in negative equity but can afford your repayments

If you keep paying your mortgage and do not need to sell your home or move house, negative equity makes little difference to your financial situation.

House prices fluctuate over time and usually increase over the long term, so it is likely your property value could rise again in the future.

If you are able to build up some equity in your property, this helps get you out of negative equity and protects you against further price declines. You can do this by continuing to pay your mortgage, or you can speed it up by making overpayments.

Check your mortgage terms and conditions carefully before you make any overpayments and check if there are any extra costs.