What is Negative Equity on a House?

(Last Updated: 26/07/2023)
9 min read
Key Takeaways
  • Economists still believe we will avoid a major market crash in 2023
  • There are several tactics which may help you to get rid of negative equity.
  • Based on the assumption that the market will eventually recover, negative equity doesn't necessarily matter if you don't sell. However, it can pose problems for remortgaging , or other borrowing.

What does it mean when a house has negative equity

When a house has negative equity, it means that the current market value of the property is lower than the outstanding mortgage balance. In other words, the homeowner owes more on the house than it is currently worth. Negative equity can have significant implications on homeowners' financial well-being and the ability to make sound real estate decisions. In this article, we will delve into the causes, consequences, and potential remedies for negative equity.

Negative Equity Example

Let's say you bought a property for £200,000 with a mortgage of £180,000 two years ago.

If the property fell in value, such that it's only worth £100,000 today, you are in negative equity.

Say you paid off £20,000 from the mortgage in the 2 years. If you chose to sell up, you'd be left owing £60,000 but with no equity to show for it.

It's important to note that negative equity isn't actual debt but potential indebtedness.

What Causes Negative Equity?

Negative equity typically arises due to a decline in property values, economic downturns, or aggressive borrowing in a rising housing market. Many homeowners may find themselves in negative equity after purchasing a property at its peak value, only to see it decrease in worth over time.

The Impact of Negative Equity

Limited Selling Options

Negative equity can hinder homeowners who wish to sell their property. If they decide to sell, they will not be able to pay off their mortgage entirely, as well as the other costs of sale and they might have to bring additional funds to the table to close the deal.

Stagnant Homeownership

Homeowners in negative equity might be discouraged from moving to a new property or upgrading their current one due to the financial burden associated with the shortfall.

Refinancing Challenges

When homeowners are in negative equity, it becomes challenging to refinance their mortgage at a lower interest rate or to take advantage of better loan terms.

Inability to Access Equity

Homeowners usually rely on the equity in their homes for various financial needs, such as home improvements or funding education. Negative equity eliminates or severely limits this option.

Greater risk of financial hardship

If you lose your job or are unable to work for any reason 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 in that much more debt to your lender and homeless; the greater your mortgage's loan to value, the worse this situation would be.

The number of people who suffer from negative equity - or potential indebtedness - normally increases when property prices are falling. In 2009, after the last UK property crash, as many as 1.1 million people were in negative equity, according to some estimates. In 2023, UK house prices overall started to fall very slightly, bringing back fears of negative equity, particularly for first time buyers 'mortgaged to the hilt' with 95% mortgages. Economists predict that the market will recover before we see a crash like 2008's.

This article considers:

Are you in Negative Equity but need to sell your home?

Our experienced negative equity sale solicitors can help and advise you.

The situation is always more dangerous the greater the loan to value ratio of your mortgage. You used to be able to get 110% mortgages and the crash is one of the reasons why you no longer can, due to debt disasters suffered by people who took out these kind of mortgages and were subsequently repossessed.

To avoid this kind of market disaster from happening again, mortgage lenders tend to pull their higher LTV products when the inflation is high.

    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:
  • Find out how much you owe on your mortgage by contacting your lender.
  • Find out the value of your home. You can get a rough idea by checking out an online property website. You can go further and ask a local estate agent or surveyor, however they may charge you for this.

    What should you do if you're in negative equity?
You don't need to do anything.

The most important thing to do is ensure that you keep your job and so keep making your mortgage repayments.

The moment any issue arises with your income, you must contact your mortgage lender at once. Lenders only repossess as a last resort, but they are always more favourable in their treatment if you approach them first to discuss your financial situation.

Did You Know?

The Mortgage Conduct of Business Rules points that a lender should “deal fairly" with homeowners in arrears.

You can use insurance to guard against loss of income - there are products such as income protection insurance and mortgage protection insurance, which can keep up your mortgage repayments for a specified period.

Click to get a free quote for Mortgage Payment Protection Insurance or call us on 0333 344 3234 to find out more

    What if you have to consider selling house in negative equity?
You may find yourself in a situation where you actually have to move when in negative equity. This might be because, for example, you've found a new job or your current job requires you to relocate, or something family-related requires this action.

As before, your first action should be to consult your mortgage lender. You should discuss any available schemes which might allow you to borrow more than 100% of the value of your new home, should you move.

There's no hiding that the risk element becomes higher - it may not be cheap, because not least, you'll end up paying a significantly higher interest rate on your mortgage. Please also note that if you’re in negative equity, some lenders won't let you move to a new build, shared ownership or shared equity property and take your mortgage with you.

Other strategies might include renting out your home (with your lender's permission) while, for example, living cheaply with relatives or friends. You should note, however, that your lender may impose higher interest rates on your mortgage because it becomes a buy to let product.

There are many other costs involved with becoming a landlord, such as having to get an Energy Performance Certificate, buy-to-let insurance and gas certificates.

Click to read what you need to know about buy to let to find out more.

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.

Lender refuses permission to sell? You can take them to court

You can apply to the 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.

    What happens if you face repossession?
Being repossessed is probably the most extreme thing that can happen as a result of negative equity.

It is, however, not a rapid process and your lender has to work with you as much as possible to avoid the eventuality.

To find out more, please read our article What Happens When you get Repossessed: The 7 Stages

In Negative Equity but need to sell your home?

Our experienced negative equity sale solicitors can help and advise you.

Frequently Asked Questions
Andrew Boast of Sam Conveyancing
Written by:
Andrew started his career in 2000 working within conveyancing solicitor firms and grew hands-on knowledge of a wide variety of conveyancing challenges and solutions. After helping in excess of 50,000 clients in his career, he uses all this experience within his article writing for SAM, mainstream media and his self published book How to Buy a House Without Killing Anyone.
Caragh Bailey, Digital Marketing Manager
Reviewed by:

Caragh is an excellent writer in her own right as well as an accomplished copy editor for both fiction and non-fiction books, news articles and editorials. She has written extensively for SAM for a variety of conveyancing, survey and mortgage related articles.

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