What is Negative Equity on a House?
When you buy a property, you expect its value to increase over time. However, economic downturns or property market fluctuations can sometimes lead to a situation where your home is worth less than the outstanding balance of your mortgage. This stressful situation is known as negative equity.
Negative equity can have significant implications for a homeowner's financial well-being and their ability to make sound real estate decisions. In this article, we delve into the causes, consequences, and potential remedies for negative equity.
- Potential, not actual, debt: Negative equity only becomes a real financial loss if you are forced to sell the property or are repossessed.
- Selling restrictions: If you sell while in negative equity, you must pay the financial shortfall to your mortgage lender to clear the debt.
- Remortgaging challenges: Negative equity makes it extremely difficult to switch to a better mortgage rate when your current deal expires.
- Don't panic: If you can comfortably continue making your monthly mortgage repayments, you can simply stay put and wait for the market to recover.
What does it mean when a house has negative equity?
When a house has negative equity, the property's current market value is less than the outstanding mortgage balance. In other words, the homeowner owes the bank more on the house than it is currently worth.
Negative Equity Example
For Example: John bought a property for £150,000 using a £15,000 deposit and a £135,000 mortgage. In two years' time, John had the property valued, and it had fallen to £125,000, while the mortgage debt was £132,000. This means that John is currently in negative equity.
As long as John is financially able to, he should continue to pay his mortgage in full and not look to sell or remortgage.
It's important to note that negative equity isn't actual debt but potential indebtedness, it only materialises if you sell.
What causes negative equity?
Negative equity typically arises due to a sudden decline in property values, economic downturns, or aggressive borrowing in a rising housing market. Many homeowners find themselves in negative equity after purchasing a property at its peak value, only to see its value decrease over time.
The situation is always more dangerous the higher your mortgage's loan-to-value (LTV) ratio. During the early 2000s, buyers could secure 110% mortgages. The 2008 crash is one of the main reasons you can no longer do so, due to the debt disasters suffered by people who took out these kinds of mortgages and were subsequently foreclosed on. To avoid this kind of market disaster, mortgage lenders now pull their higher LTV products when inflation is high.
The impact of negative equity
The impact of negative equity varies depending on what you are doing that has caused it.
Limited Selling Options
Negative equity can hinder homeowners who wish to sell their property. If they decide to sell, the sale price will not cover the mortgage. This means they will not be able to pay off their loan in full, will struggle to cover the other costs of the sale, and will likely need to bring additional cash to the table to close the deal.
Stagnant Homeownership
Homeowners with negative equity might be discouraged from moving to a new property or upgrading their current one due to the financial burden of the shortfall.
Refinancing Challenges
When homeowners are in negative equity, it becomes incredibly challenging to refinance (remortgage) their property at a lower interest rate or take advantage of better loan terms, leaving them stuck on their lender's expensive Standard Variable Rate (SVR).
Inability to Access Equity
Homeowners usually rely on their home equity for various financial needs, such as home improvements or education expenses. Negative equity eliminates or severely limits this option.
Greater risk of financial hardship
If you lose your job and your house is repossessed because you can't make the payments, your house will no longer be an asset to support you, but a burden. You'll be even more in debt to your lender and homeless; the higher your mortgage's loan-to-value ratio, the worse this will be.
The number of people with negative equity typically increases when property prices are falling. In 2009, after the UK property crash, as many as 1.1 million people were in negative equity. However, economists generally predict that while markets experience minor dips, strict modern lending criteria mean the housing market is well insulated against crashes on the scale of the 2008 crisis.
How do you find out if you're in negative equity?
If you're worried about whether you're in negative equity or at risk of being so, you should take the following steps:
- Check your balance: Find out exactly how much you currently owe on your mortgage by contacting your lender or checking your online portal.
- Check your property value: Find out the current market value of your home. You can get a rough idea by checking online property portals (like Rightmove or Zoopla). To go further, you can ask a local estate agent or a RICS surveyor, although a formal survey will incur a fee.
What should you do if you're in negative equity?
You do not actually need to do anything. The most important thing to do is to ensure you keep your job and continue making your monthly mortgage repayments on time.
The moment any issue arises with your income, you must contact your mortgage lender at once. Lenders only repossess properties as an absolute last resort, and they are always more favourable in their treatment if you approach them proactively to discuss your financial situation.
What if you have to sell a house in negative equity?
You may find yourself in a situation where you absolutely have to move while in negative equity. This might be because you need to relocate for a new job, or a significant family change requires action.
As before, your first action should be to consult your mortgage lender. You should discuss any available schemes that might allow you to borrow more than 100% of your new home's value if you move. There is no hiding the fact that the risk element is higher; you will likely end up paying a significantly higher interest rate on your new mortgage. Please also note that if you’re in negative equity, many lenders will not let you move to a new build, shared ownership, or shared equity property and port your mortgage.
Expert Tip: Lender refuses permission to sell? You can take them to court
According to the Mortgage Conduct of Business Rules, your lender must "give consideration to the customer being allowed to remain in possession to effect a sale". If you simply can't afford to live in your house, your lender must consider allowing you to sell up, regardless of whether the sale price covers the outstanding mortgage.
If they refuse, you can apply to the county court for an order for sale under the Trusts of Land & Appointment of Trustees Act 1996. If you're successful, the court can order a sale regardless of the lender's wishes.
CEO of SAM Conveyancing
What happens if you face repossession?
Being repossessed is the most extreme outcome that can result from negative equity combined with falling into mortgage arrears. It is, however, not a rapid process, and your lender is legally obligated to work with you to the greatest extent possible to avoid this eventuality.
To find out exactly how the legal timeline works, please read our article: What Happens When You Get Repossessed: The 7 Stages.
In Negative Equity, but you need to sell your home?
Our experienced negative equity sale solicitors can advise you on the best legal steps to protect your finances.
Frequently Asked Questions
Andrew Boast FMAAT is a qualified accountant, conveyancing specialist and author with over 25 years of experience in the UK property sector. Since beginning his career in 2000 within established SRA and CLC-regulated conveyancing solicitor firms, Andrew has overseen the legal journeys of more than 75,000 clients.
He is the self-published author of the first-time buyer guide: How to Buy a House Without Killing Anyone, and a frequent contributor to mainstream UK media on legislative updates, property law, first-time buyer guides, conveyancing best practices, and stamp duty changes. Andrew specialises in resolving complex title issues, property conflict disputes, and property tax options, streamlining the enquiry process to reduce transaction times and maintaining a client-friendly focus.
Amanda Ambler is a highly accomplished conveyancing specialist with over 15 years of dedicated experience across residential property law, legal compliance, and practice management. Having held senior roles, including Head of Legal Practice and Head of Conveyancing at established UK law firms, Amanda possesses a profound, hands-on understanding of the technical intricacies of the property market.
As the designated Legal Content Reviewer for SAM Conveyancing, Amanda ensures that every guide, legal update, and resource published meets the absolute highest standards of accuracy, regulatory compliance, and factual integrity. Her rigorous review process guarantees that complex property legislation and industry processes are communicated clearly, transparently, and safely for home buyers and sellers alike.
