What Is Negative Equity? A Complete UK Guide for Homeowners
Negative equity occurs when your mortgage is worth more than your property’s current market value, making it harder to sell or remortgage.
What Is Negative Equity? A Complete UK Guide for Homeowners
Negative equity occurs when your outstanding mortgage balance exceeds your home’s current market value. In simple terms, if you sold your property today, the sale proceeds wouldn’t be enough to repay your mortgage in full. This can make moving home, remortgaging or selling your property more complicated, but it doesn’t necessarily mean you’re in financial difficulty.
For many homeowners, discovering they’re in negative equity can be worrying. You may have planned to move, remortgage or sell your home, only to find that falling house prices or a large mortgage mean you owe more than your property is worth.
Although negative equity can limit your options, it’s important to remember that it’s not uncommon, particularly after periods of falling property prices or if you’ve bought a home with a small deposit. In many cases, homeowners are able to recover over time as they repay their mortgages and property values increase.
Understanding what negative equity is, how it happens, and the options available can help you make informed decisions about your next steps.
In this guide, we’ll explain everything you need to know about negative equity, including how to calculate it, how it affects homeowners and what you can do if you find yourself in this position.
What is negative equity?
Equity is the difference between your property’s market value and the amount you still owe on your mortgage.
When your property is worth more than your mortgage, you have positive equity.
When your mortgage balance becomes greater than your property’s market value, you have negative equity.
For example, imagine your home is currently worth £220,000, but your outstanding mortgage is £245,000.
If you sold the property for its current market value, you would still owe your lender £25,000, even after the sale completed.
That £25,000 represents your negative equity.
How does negative equity happen?
Negative equity usually develops when property values fall or when homeowners have borrowed a large percentage of the property’s value.
Several factors can contribute to this situation.
Falling house prices
The most common cause is a decline in property prices.
If house prices fall after you’ve bought your home, your mortgage may remain largely unchanged while your property’s market value decreases.
Even though you’re making your monthly mortgage payments, the reduction in your home’s value may mean you owe more than it’s currently worth.
Buying with a small deposit
Many first-time buyers purchase a property with a 5% or 10% deposit.
While this makes home ownership more accessible, it also means there’s very little equity in the property at the beginning of the mortgage.
Even a relatively small drop in house prices can push these homeowners into negative equity.
For example, if you purchased a £300,000 property with a 5% deposit, your mortgage would initially be £285,000. If the property’s value later fell to £270,000, your mortgage could exceed the property’s value, creating negative equity.
Interest-only mortgages
Some homeowners have interest-only mortgages, where monthly payments cover only the interest charged by the lender rather than reducing the capital borrowed.
Unless separate arrangements are made to repay the capital, the mortgage balance remains largely unchanged throughout the mortgage term.
If property values fall during this period, homeowners with interest-only mortgages may be more vulnerable to negative equity.
Borrowing against your home
Homeowners sometimes increase their borrowing through further advances or secured loans to fund home improvements, debt consolidation or other major expenses.
While this can provide access to additional funds, it also increases the amount secured against the property.
If property values later decline, the increased borrowing may contribute to negative equity.
How do you calculate negative equity?
Calculating negative equity is relatively straightforward.
You’ll need two pieces of information:
- Your property’s current market value.
- Your outstanding mortgage balance.
Subtract the property’s current value from the amount you still owe on your mortgage.
For example:
Current market value: £240,000
Outstanding mortgage: £265,000
Negative equity: £25,000
If your mortgage balance is lower than the property’s value, you have positive equity instead.
Remember that your property’s value should be based on realistic market evidence rather than what you hope it might sell for.
Obtaining several valuations from local estate agents or a RICS surveyor can provide a more accurate picture.
Is negative equity common?
Negative equity tends to become more common during periods of falling house prices or wider economic uncertainty.
It was particularly widespread during the housing market downturn of the early 1990s and again affected some homeowners following the global financial crisis in 2008.
Today, most homeowners gradually build equity as they repay their mortgage and property values increase over time.
However, buyers who purchased recently with a small deposit may still be more exposed if local property prices fall.
It’s important to remember that being in negative equity doesn’t automatically mean you’ve missed mortgage payments or are experiencing financial difficulties.
Many homeowners continue making their mortgage repayments as normal while waiting for their equity position to improve.
Does negative equity affect everyone in the same way?
No.
The impact depends largely on your circumstances.
If you’re planning to stay in your home for many years and continue making your mortgage repayments, negative equity may have very little effect on your day-to-day life.
Over time, your mortgage balance is likely to reduce, and if property prices rise, you may eventually move back into positive equity.
However, if you need to move home, remortgage or sell the property in the near future, negative equity can create additional challenges.
This is why understanding your financial position early is so important.
How can I find out if I’m in negative equity?
The first step is to establish how much your property is currently worth.
Many homeowners begin by obtaining valuations from several local estate agents. For a more formal assessment, you may wish to instruct a chartered surveyor to provide an independent market valuation.
Next, contact your mortgage lender or check your latest mortgage statement to confirm your outstanding balance.
Comparing these two figures will usually give you a clear indication of whether you’re in positive or negative equity.
If you’re uncertain, a mortgage adviser can help you understand your position and discuss the options available.
Negative equity vs mortgage arrears
Negative equity and mortgage arrears are often confused, but they’re very different.
Negative equity relates to the value of your property compared with the amount you owe.
Mortgage arrears occur when you’ve missed mortgage payments.
It’s entirely possible to be in negative equity while making every mortgage payment on time.
Equally, someone with substantial positive equity can still fall into mortgage arrears if they experience financial difficulties.
Understanding the difference is important because the solutions available will often depend on which situation applies to you.
Common myths about negative equity
Many homeowners believe that negative equity means they must immediately sell their home or that they’ll automatically lose the property.
Neither of these assumptions is true.
As long as you continue meeting your mortgage repayments, many lenders will continue to support you in the normal way.
Another common misconception is that negative equity damages your credit score.
Negative equity itself doesn’t affect your credit rating.
Your credit history is generally influenced by how you manage your borrowing rather than the value of your property.
Finally, some people believe there’s nothing they can do to improve the situation.
In reality, there are several potential options, including making mortgage overpayments, remaining in the property until equity improves, renting the property (subject to lender approval) or discussing alternative arrangements with your mortgage lender.
Can You Sell a House in Negative Equity?
Yes, it’s possible to sell a house that’s in negative equity, but it’s usually more complicated than selling a property with positive equity.
The main challenge is that the money from the sale won’t be enough to repay your mortgage in full. Before the sale can complete, your mortgage lender will normally need to agree how the remaining balance, often referred to as the mortgage shortfall, will be repaid.
Every lender has its own policies, so it’s important to speak to them as early as possible if you’re considering selling.
In many cases, lenders are willing to discuss your options, particularly if you’re experiencing a genuine change in circumstances such as relocation, divorce or financial hardship.
Do you need your lender’s permission?
Usually, yes.
Because the sale proceeds won’t fully repay the mortgage, your lender will normally need to approve the sale before it can complete.
They’ll want to understand:
- Why you’re selling.
- How much negative equity exists.
- How the remaining balance will be repaid.
- Whether you’ve explored alternative options.
Providing clear information and speaking to your lender early can often make the process much smoother.
Ignoring the situation or attempting to sell without discussing it with your lender could delay the transaction significantly.
What happens to the mortgage shortfall?
If your property sells for less than the amount outstanding on your mortgage, you’ll normally still be responsible for repaying the remaining balance.
For example:
- Outstanding mortgage: £245,000
- Sale price: £225,000
Mortgage shortfall: £20,000
The lender will usually expect this £20,000 to be repaid.
Depending on your circumstances, this may involve:
- Paying the shortfall using savings.
- Agreeing a repayment arrangement with your lender.
- Adding the shortfall to a new mortgage where the lender permits this.
- Using proceeds from another asset.
The options available depend on your lender’s criteria and your financial position.
Can you move house if you’re in negative equity?
Moving home while in negative equity can be more challenging, but it isn’t always impossible.
Some lenders allow existing customers to port their mortgage to another property.
Porting means transferring your current mortgage product to your next home rather than taking out a completely new mortgage.
Whether this is possible depends on factors such as:
- Your affordability.
- The amount of negative equity.
- The value of your new property.
- Your income and employment.
- The lender’s current lending policy.
Even if porting is available, you’ll usually still need to agree how any remaining shortfall will be dealt with.
Can you remortgage if you’re in negative equity?
Remortgaging becomes much more difficult when you’re in negative equity.
Most lenders require borrowers to have a certain amount of equity before approving a new mortgage.
This is commonly measured using the loan-to-value ratio (LTV).
If your mortgage exceeds your property’s value, your LTV is effectively above 100%, making many standard remortgage products unavailable.
However, some lenders may offer options to existing customers, particularly if you’ve maintained your mortgage payments and your financial circumstances remain strong.
Speaking to an independent mortgage adviser can help you understand what products, if any, may be available.
Should you wait for house prices to recover?
For homeowners who don’t need to move immediately, remaining in the property may sometimes be the simplest solution.
As you continue making your mortgage repayments, the amount you owe gradually reduces.
If property prices increase over time, your equity position may also improve.
This combination of mortgage repayments and rising property values can eventually move you back into positive equity.
Of course, property prices aren’t guaranteed to rise, and nobody can accurately predict future market conditions.
Your decision should therefore be based on your personal circumstances rather than trying to time the housing market perfectly.
Making mortgage overpayments
If your mortgage allows overpayments without significant penalties, paying more than your required monthly payment can help reduce negative equity more quickly.
Every additional payment reduces the outstanding mortgage balance and may also reduce the total amount of interest paid over the life of the mortgage.
Before making overpayments, check with your lender whether any limits or early repayment charges apply.
Many lenders allow borrowers to overpay a certain percentage of their mortgage each year without incurring additional fees.
Even relatively modest overpayments can make a noticeable difference over time.
Could you rent the property instead?
If selling isn’t currently practical, renting the property may be another option worth considering.
Rental income could help cover your mortgage payments while you wait for your equity position to improve.
However, this isn’t simply a matter of finding tenants.
You’ll usually need to speak to your mortgage lender first.
Depending on your circumstances, they may grant consent to let or require you to switch to a buy-to-let mortgage.
You’ll also need to understand your responsibilities as a landlord, including maintenance, insurance, legal compliance and paying tax on any rental profits.
Before choosing this option, it’s sensible to calculate whether the expected rental income will comfortably cover your mortgage and other ongoing costs.
Can you sell to a cash buyer?
Yes, but negative equity doesn’t disappear simply because you’re selling to a cash buyer.
Whether you sell through an estate agent or directly to a professional cash buyer, your mortgage lender will still expect the outstanding mortgage to be repaid.
If the agreed sale price doesn’t clear the mortgage balance, you’ll still need your lender’s agreement regarding the shortfall.
The advantage of a cash buyer is that the transaction itself may progress much more quickly because there is usually no onward chain or mortgage approval required on the buyer’s side.
For homeowners facing time-sensitive situations, this certainty can sometimes be valuable.
Pros and cons of the available options
Every solution has advantages and disadvantages.
Selling immediately
Selling allows you to move on with your plans but usually requires the mortgage shortfall to be resolved before completion.
Remaining in the property
Staying put gives you time to continue reducing your mortgage balance and potentially benefit from future house price growth, although it may delay other life plans.
Renting the property
Letting the property could generate income while allowing time for equity to improve, but becoming a landlord brings additional legal responsibilities and ongoing costs.
Making overpayments
Reducing your mortgage balance faster can improve your equity position, but only if your finances allow for higher monthly payments.
The best option depends on your personal circumstances, financial goals and the level of negative equity involved.
When should you seek professional advice?
If you’re in negative equity, it’s worth seeking advice before making major decisions.
Speaking with your mortgage lender should usually be your first step, as they can explain the options available under your existing mortgage.
You may also benefit from advice from:
- An independent mortgage adviser.
- A financial adviser.
- A solicitor if you’re selling the property.
- A debt adviser if you’re experiencing financial difficulties.
Obtaining professional guidance early can often help you identify solutions that you may not have considered.
Key points to remember
Although negative equity can make moving or selling more challenging, it doesn’t mean you have no options.
Many homeowners successfully navigate negative equity by working closely with their lender, remaining in their property until their equity improves or exploring alternatives such as porting their mortgage or renting the property.
Understanding the advantages and disadvantages of each option is the first step towards finding the solution that’s right for your circumstances.
Common Mistakes to Avoid When You’re in Negative Equity
Discovering that your property is in negative equity can be stressful, but rushing into a decision can often make the situation worse.
One of the biggest mistakes homeowners make is assuming they have no options. While negative equity can limit your choices, it doesn’t automatically mean you have to sell your home or that repossession is inevitable. Many homeowners continue living in their property, make regular mortgage repayments and eventually return to positive equity as their mortgage balance falls and property values recover.
Another common mistake is failing to speak to the mortgage lender early. If you’re considering selling, moving or struggling with your repayments, contacting your lender as soon as possible gives you the best chance of exploring available options before the situation becomes more difficult.
Some homeowners also underestimate the true costs of moving. Even if you’re able to sell, you’ll still need to consider estate agent fees, legal costs, removal expenses and, if you’re buying another property, Stamp Duty Land Tax where applicable. These costs can increase the amount you’ll need to find if you’re already dealing with a mortgage shortfall.
Finally, avoid relying on estimated property values from online calculators alone. If you’re making significant financial decisions, obtaining several professional valuations will provide a much clearer picture of your property’s true market value.
Negative Equity Checklist
If you think your property may be in negative equity, working through the following checklist can help you understand your position and plan your next steps.
- Obtain two or three independent property valuations.
- Check your latest mortgage balance with your lender.
- Calculate whether your mortgage exceeds your property’s value.
- Speak to your lender before making any decisions about selling.
- Consider whether remaining in the property is financially viable.
- Explore whether mortgage overpayments could improve your position.
- If you’re moving, ask your lender whether mortgage porting is available.
- Calculate all moving costs, not just the mortgage shortfall.
- Seek independent mortgage or financial advice if you’re unsure of your options.
- Avoid making rushed decisions based solely on short-term market movements.
Taking these steps can help you understand your choices before committing to any long-term financial decision.
Frequently Asked Questions
Can I sell my house if it’s in negative equity?
Yes, but you’ll usually need your mortgage lender’s agreement because the sale proceeds won’t fully repay the outstanding mortgage.
You’ll also need a plan for repaying the remaining mortgage shortfall.
Does negative equity affect my credit score?
Negative equity itself doesn’t affect your credit rating.
However, missing mortgage repayments or defaulting on your loan can have a significant impact on your credit file.
As long as you continue making your agreed mortgage payments on time, negative equity alone won’t damage your credit score.
Can I remortgage while in negative equity?
It can be difficult.
Many lenders require borrowers to have a certain level of equity before approving a remortgage.
Some existing lenders may still offer options, so it’s worth speaking to your lender or an independent mortgage adviser.
How long does it take to get out of negative equity?
There isn’t a fixed timescale.
It depends on several factors, including:
- How much negative equity you have.
- How quickly you repay your mortgage.
- Changes in local property prices.
- Whether you make additional mortgage overpayments.
For some homeowners, it may take a few years, while for others it could happen much sooner if house prices rise.
Can I rent out my property instead of selling?
Possibly.
Many homeowners choose to let their property while waiting for their equity position to improve.
Before doing so, you’ll normally need your lender’s permission, either through consent to let or by changing to an appropriate buy-to-let mortgage.
You’ll also become responsible for complying with landlord legislation.
Is negative equity the same as being in debt?
Not exactly.
Negative equity simply means your mortgage is larger than your property’s current market value.
It doesn’t necessarily mean you’re experiencing financial difficulty.
Many homeowners remain in negative equity while continuing to meet all of their mortgage repayments without any issues.
Will house prices recover?
Property markets naturally rise and fall over time.
Although many homeowners eventually benefit from increasing property values, there’s no guarantee that prices will rise within a particular timeframe.
For this reason, it’s generally better to base decisions on your personal circumstances rather than trying to predict future house price movements.
Can I sell to a cash house buyer if I’m in negative equity?
Yes.
Professional cash buyers can purchase properties in negative equity, but your mortgage lender must still agree how any remaining mortgage shortfall will be settled before the sale can complete.
Selling to a cash buyer may provide greater speed and certainty, but it doesn’t remove your responsibility to repay the outstanding mortgage balance.
Final Thoughts
Negative equity can feel overwhelming at first, but it doesn’t mean you’re out of options.
Many homeowners experience periods where their mortgage exceeds the value of their property, particularly after buying with a small deposit or during times of falling house prices. In many cases, continuing to make regular mortgage repayments while reviewing your options carefully can significantly improve your financial position over time.
If you do need to move, understanding your lender’s requirements, calculating the true cost of selling and seeking professional advice early can help you make informed decisions and avoid unnecessary complications.
The most important thing is not to panic. Every homeowner’s circumstances are different, and the right solution will depend on your finances, your future plans and the amount of negative equity involved.
Need to Sell Your House?
If you’ve decided that selling is the right option, We Buy Any House may be able to help.
We purchase residential properties across England and Wales in any condition, with no estate agent fees, free legal fees and no obligation to accept our offer.
If your property is in negative equity, we’ll explain how the process works and whether a sale is possible based on your individual circumstances. Any outstanding mortgage must still be redeemed, and if the agreed sale price doesn’t fully repay your mortgage, you’ll need your lender’s agreement on how the remaining balance will be settled.
We can complete in as little as three days, or on a timescale that suits you.
Contact We Buy Any House today for a free, no-obligation cash offer and find out whether we can help you move forward.