What is negative equity?

Negative equity happens when the amount you owe on your mortgage is more than your property is currently worth. For example, if you owe £220,000 on your mortgage but your home would only sell for £200,000 in the current market, you are £20,000 in negative equity. It's a situation that can affect any homeowner, though it is far more likely for those who bought with a small deposit (a high loan-to-value mortgage) in a market that has since fallen.

What causes negative equity?

Falling house prices

The most common cause is a general fall in property values in your area, or across the market as a whole, which can happen during economic downturns, periods of high interest rates dampening demand, or corrections after rapid price growth. Since this is largely outside any individual homeowner's control, it can affect even careful, well-prepared buyers.

High loan-to-value borrowing

Buyers who purchased with a small deposit (for example, a 5% or 10% deposit, meaning a 90-95% loan-to-value mortgage) have far less of a buffer before any price fall pushes them into negative equity, compared with someone who put down a 25% or 40% deposit. New-build properties can also be more exposed, since some new-build prices include a premium that can fall away once the property is no longer "new."

What negative equity actually means for you

It's important to understand what negative equity does and doesn't affect. If you're not planning to sell or move, and you can comfortably continue making your mortgage payments, negative equity on paper doesn't change your monthly repayments, and it doesn't mean the lender can demand extra money from you or repossess your home simply because of a valuation change. It becomes a practical problem specifically when you want or need to sell or remortgage.

Difficulty selling

If you try to sell while in negative equity, the sale proceeds won't be enough to repay your mortgage in full, meaning you'd need to find the shortfall from savings or another source to complete the sale and fully redeem the mortgage — lenders won't normally let a sale complete with an unpaid balance left outstanding (a "shortfall sale") without this being agreed in advance, and doing so can affect your credit record.

Difficulty remortgaging

When your current mortgage deal ends, negative equity can severely limit your remortgaging options, since most new lenders require a maximum loan-to-value that your negative equity position no longer meets. In many cases, the best available option is to stay with your existing lender and move onto whatever new deal or their standard variable rate allows, since existing lenders sometimes offer limited "product transfer" options even without a full new valuation-based application.

What to do if you're in negative equity

  • Keep making your payments: as long as you keep up repayments, negative equity alone doesn't put your home at risk, and over time, paying down the capital and any market recovery will gradually reduce or eliminate the gap.
  • Avoid selling unless you have to: if you don't need to move, waiting out the negative equity period, rather than forcing a sale and having to fund a shortfall, is usually the more financially sensible path.
  • Consider overpaying if you can afford to: making extra mortgage overpayments (checking first for any early repayment charge limits) reduces your loan balance faster, helping you climb out of negative equity sooner.
  • Speak to your current lender before your deal ends: understanding what product transfer options might be available to you, even without an improved valuation, avoids an unwelcome surprise when your current rate expires.
  • Be wary of pressure to sell quickly at a loss unless your circumstances genuinely require a move — job relocation, family changes, or financial hardship — in which case speaking to a mortgage adviser about your realistic options is worthwhile.

Key takeaways

  • Negative equity means owing more on your mortgage than your home is currently worth.
  • It's usually caused by falling house prices, and the risk is higher for those who bought with a small deposit.
  • If you're not selling or remortgaging and can keep paying, negative equity doesn't affect your day-to-day mortgage or put your home at immediate risk.
  • It becomes a practical problem mainly when trying to sell (needing to cover a shortfall) or remortgage (limited by loan-to-value requirements).
  • Continuing payments, avoiding unnecessary sales, overpaying where possible, and talking to your existing lender are the main practical responses.