While most property purchases require a sizeable deposit these days, an estimated 500,000 homeowners in the UK are in a situation of negative equity. But what is negative equity? This guide shows you what it means, and how to deal with it.
FAQs
Negative equity meaning: What is negative equity?
Negative equity is when your property is worth less than the mortgage taken out on it. ‘Equity’ is the amount of your own money you have invested in the property, through the initial deposit and any of your mortgage you have paid off since the purchase. So, if you only paid a small deposit and make marginal repayments on the mortgage, your equity will be low.
For example, imagine you have bought a house for £200,000. You pay a 5% deposit (this is the usual minimum deposit amount) of £10,000. You arrange for a mortgage to cover the remaining £190,000, and choose an ‘interest-only’ repayment plan.
In this situation, your equity is only £10,000, and it won’t grow until you start repaying the capital sum of the mortgage. This means that if the house value falls, you might find yourself in a position of negative equity.
How does negative equity happen?
Negative equity generally only happens if the value of the property falls for whatever reason. Taking the example above, let’s say that the house you bought for £200,000 is in an area with falling house prices. If its value dropped by 10%, it would be worth only £180,000, which is less than the £190,000 you owe the mortgage provider.
This means that if you had to sell the house at this price, the sale value would not be enough to cover the £190,000 mortgage loan. You would still have an additional £10,000 that you would need to pay off. This is how negative equity happens.
Another regular cause of negative equity is the property suffering significant damage. This could be caused by a major fire or flood, for example.
How do I know if I’m in negative equity?
You can find out if you’re in negative equity by checking the value of the property. Then you can compare its value to the amount of money you owe on your mortgage loan.
You can ask an estate agent for a valuation of your property. Finding out how much you owe on your mortgage can be done easily online or over the phone. Your mortgage provider should be able to give you clear instructions on how to access your account with them.
Is negative equity a problem?
Negative equity can be a problem if you want to sell your property or remortgage it. Lenders generally don’t permit someone who’s in negative equity to refinance their mortgage. This means that you won’t be able to move over to a cheaper deal or a better interest rate.
How do you sell a house with negative equity?
If you want to sell your home, you will need to arrange to pay off the amount of negative equity, meaning that this amount will have to come out of your own pocket. In our example above, you would have to pay the outstanding £10,000 from your savings or a personal loan. This would have to be done before the property sale was final.
Alternatively, you could opt for a negative equity loan. This is where the bank lets you carry over your existing mortgage to the new property you want to buy. However, not many lenders offer this product. Additionally, to qualify you must show that you can keep on top of your repayments.
Does negative equity hurt your credit?
Owning a property with negative equity won’t hurt your credit rating by itself. However, it can lead to the kind of financial difficulties that might make you miss mortgage repayments. This will hurt your credit rating.
For more advice on how to manage financial difficulties related to negative equity, you can consult with Negative Equity UK.
How do I get rid of negative equity?
You can get rid of negative equity in a few different ways:
- Increase your monthly mortgage repayments until you owe the provider less than the property’s value.
- Make a lump sum repayment on your mortgage to reduce the amount you owe in one go.
- Rent out your property – or part of it – and use the rental income to overpay on the mortgage.
- Boost the value of the property by making improvements to it.
- Consult your lender and see if they have any specialist mortgage products that can help you.
How can you avoid negative equity?
You can avoid falling into negative equity by:
- Buying a property in a reliably desirable area where house prices are stable
- Avoiding properties in areas with high crime or high risk of flooding, fire, etc
- Committing to a repayment plan which reduces the initial mortgage sum
- Boosting the value of your property through improvements
What happens when you go into negative equity?
If you go into negative equity, nothing happens immediately. In fact, the only way to discover that you are in a position of negative equity is to get your home valued.
If you discover that you are in negative equity, there is no immediate need to resolve it. However, it is important to be aware of the long-term financial problems of negative equity. You should also begin to form a plan of how you will raise your equity in the property, ideally long before you want to sell up.
How much of a problem is negative equity?
While it isn’t an immediate problem, negative equity can limit your financial options. If you don’t have to sell, you can just wait and slowly repay the mortgage. However, if you can’t remortgage, and you can’t afford to cover the difference if you’re forced to sell, you’ll have to make a deal with your lender.
Lenders will often agree to a deal where you arrange the sale of the property, even if the final sale value is less than the mortgage amount owed. They accept this lesser amount and write off the remainder of the debt. They will usually only agree to this if it gets them more money than simply repossessing your property.
So negative equity is not necessarily a major problem, but it shouldn’t be ignored. If you have a strategy for repaying your mortgage, you can avoid the worst outcomes associated with negative equity.
Does negative equity go away by itself?
Negative equity can sometimes go away by itself. Negative equity can be linked to market conditions. A declining property market could reduce the value of your property, pushing you into negative equity. However, if you’re in no rush to sell the property, you could wait until favourable market conditions return, pushing you out of negative equity as the property value rises.
Should I be worried about negative equity?
Negative equity is only likely to be an immediate concern if you’re trying to sell your property in unfavourable market conditions. It can also be a worry if you’re struggling to keep up with your mortgage repayments, or you’re trying to remortgage your home. However, in many scenarios you may not even realise you’re in negative equity, and it won’t affect your everyday life whatsoever.
Is negative equity becoming more common in 2024?
In 2024 in the UK, the property market has seen its first steady decline in years. House prices across the UK fell by an average of 1.8% in 2023. As such, more and more people are being pushed into negative equity.
UK banks have warned homeowners of the risks, and particularly the risk for first-time buyers, who are more likely to have high loan-to-value mortgages and small amounts of equity in their home. However, UK banks have also advised that this period of greater negative equity in UK homeownership is likely to be a temporary situation.
If you need more advice on how to get a mortgage, our first-time buyer’s guide has you covered. Even if you have bad credit, another of our guides shows that it’s possible to get a mortgage anyway.
HomeViews provides verified resident reviews of the UK’s housing developments. We’re working with developers, landlords and the Government to recognise high performers and help to improve standards in the built environment.
