What does negative equity on a property mean?

With the property market on a seemingly upward rise for many years, we might have put the concept of negative equity to the back of our minds. But for homeowners with mortgages, a fall in property prices brings a risk of negative equity.

Here are some common questions about negative equity.

What is negative equity?
If the market value of your property is less than the mortgage you have still to pay on that property, you are said to have ‘negative equity’. Usually, homeowners own (positive) equity in their property. For example, if your home is worth £200,000 and you have a mortgage for £190,000, you own equity of £10,000 in your home. But if your home is worth £180,000 and you have a mortgage for £190,000, you own equity of minus £10,000 in your home. In other words, you have negative equity.

How does negative equity happen?
Most commonly, negative equity occurs when a buyer has taken out a mortgage with a high loan-to-value (LTV) ratio and then house prices fall. So, a £190,000 mortgage against a property worth £200,000 is considered a high LTV mortgage, because it is 95% of the property value. If house prices fall, and the property is now worth only £180,000, the buyer has negative equity.

How do you know if you have negative equity?
You might not know. So, if you’ve recently bought a home with a high LTV mortgage and you find out that house prices have fallen, you might want to check. To find out, speak to your mortgage provider to see exactly how much you owe, and an estate agent or surveyor to get the market value of your property. Then use this sum: Property market value minus the mortgage owed equals the equity (or negative equity).

Is negative equity a problem?
If you’re planning to stay in your home for many more years, you could be in negative equity without it affecting your daily life. Negative equity becomes a problem if you want to sell your home, or if your mortgage deal is coming to an end.

Can you sell your home with negative equity?
If you sell your home for less than you owe your mortgage provider, you will need to have another way to repay the total amount. If your mortgage provider believes that you don’t have means to do that, they won’t allow you to sell.

Can you remortgage with negative equity?
If you had planned to remortgage at the end of your current deal, this will be much harder if you have negative equity. Unless you reduce your negative equity, you’ll probably have to start making repayments at your mortgage provider’s standard variable rate (SVR), which can be higher than you’re used to. If this is going to cause you financial difficulties, speak to them as soon as possible.

What are your options if you have negative equity?

1. Wait it out
If you can afford your mortgage repayments and don’t need to move, you can simply stay where you are. Continue to increase your equity by making your monthly repayments, and wait for house prices to rise over time, as they usually do.

2. Make early repayments
If you have cash elsewhere, find out if your mortgage provider allows early repayments. You can pay back the difference between your property’s market value and the mortgage you owe, and you’ll no longer have negative equity. Then you’ll be able get a new mortgage deal or sell your home.

3. Get a negative equity mortgage
In rare instances, mortgage providers may allow you to move home and carry over your negative equity to the new property. You’ll need a deposit for the new property and will lose any money you had paid against your existing home.

4. Rent out your home
If your mortgage repayments increase and you can no longer afford to pay them, you might be able to rent out your home, while you live in a different property that you’ve rented at a lower price. You’ll need your mortgage provider’s permission to do this.

5. Make home improvements
Another way to reduce negative equity is to increase the value of your home, so that your mortgage accounts for a smaller percentage of the value. You might be able to do this by completing home improvement work if you budget it carefully.

Most of these options have costs involved and you should make some careful calculations before making your final decision.