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Negative Equity

Negative equity is when you owe your mortgage lender more than your home is worth. This can happen when property prices fall and your house drops in value after you’ve bought it.

GoCompare author
Updated 19 November 2021  | 3 mins read

What’s negative equity?

Negative equity is when you owe your mortgage lender more than your home is worth. This can happen when property prices fall and your house drops in value after you’ve bought it.

It’s not a big problem until it comes to selling the property. This is because you won’t have made enough on the property to repay the loan from your mortgage lender.

Key points

  • Negative equity is when your house is worth less than your mortgage
  • If you’re in this situation, you’ll need to get permission from your lender to sell your home and you may not be able to remortgage
  • Negative equity won’t affect your credit rating as long as you can continue making repayments and can cover the shortfall if you move house
  • If possible, try to stay put in your home and build up equity over time
  • Steps to help prevent negative equity include paying a fair price for your home, making monthly overpayments, and avoiding interest-only mortgages

How can negative equity affect me financially?

Being in negative equity can make things more difficult financially. For example, if you want to sell your home you’ll need to get permission from your mortgage lender.

Your bank or building society might agree to transferring your current mortgage to a new property rather than paying it off and taking out a new one.

Although being in negative equity shouldn’t affect your credit score, if you miss repayments or need to move house and can’t make up the shortfall, this will go on your credit record.

It’s also likely you’ll find it more difficult to remortgage and get a better deal - because there’s not enough equity in your property to be used as security.

However, if you don’t need to move house and can keep up with your mortgage repayments, being in negative equity may not have any impact on your normal everyday finances.

How can I tell if I have negative equity?

First, you need to check how much is left to pay on your mortgage - look at your most recent statement or contact your lender if you’re not sure.

Then find out your property’s current value. You can do this by asking a local estate agent to value your home or you could pay an independent surveyor for a valuation.

You’ll need to compare these two values - if your home is worth less than you owe, you’re in negative equity.

Can I move home if I have negative equity?

While it’s best to stay put if you’re in negative equity, there are times when you need to move, like for a career change or if you have a growing family.

To sell your home you’ll need to persuade your lender you’ve got the best price for your property. Most lenders will let you sell and pay off the shortfall over a period of time using a payment plan.

Alternatively, a small number of providers offer negative equity mortgages - letting you transfer your current mortgage to a new property. These often come with very high interest rates and you might also face an early repayment fee.

Be aware that selling while you’re in negative equity will mean you’ll lose the deposit you had in your home, so this may affect whether you can buy a new property.

Can I rent out my home if I’m in negative equity?

Yes, this can be an alternative option to selling your home. It’s possible to let your existing home out while you wait for property prices to rise.

You’ll need permission from your lender to let it. You may have to pay a higher interest rate and possibly an annual ‘consent to let’ fee. You’ll also need to let your insurer know.

But remember, if you’re renting out your home, you’ll need to cover the mortgage during any time you don’t have tenants - which could be costly.

How can I avoid getting into negative equity?

There are a few steps that can help prevent you from getting into a situation where your home is worth less than your mortgage:

  1. Pay a fair price for your home

    Do some research, look online and speak to experts to check you’re paying the market value for the property

  2. Buy at the right time

    Understand when property prices are high and low. If they’re at a peak, hold off buying until they start to fall again

  3. Pay a bigger deposit

    The more deposit you can pay, the more equity you’ll have in your property. This will help to prevent you from going into negative equity

  4. Pay extra on your mortgage every month

    This will reduce how much you owe and help to build up equity in your property, so check how much extra you’re allowed to pay

  5. Avoid taking out an interest-only mortgage

    Although the payments are cheaper, you won’t be paying off any of the capital so there’s less chance of increasing your equity

  6. Remortgage when your deal ends

    This helps to make sure you’re paying the best rate and reduce the amount of interest that’s being added to your loan

What should I do if my property has negative equity?

This all depends on your circumstances. If you don’t need to move and are able to continue making your repayments, the best thing to do is to stay put while you build up more equity.

Making monthly overpayments is also an option you can use to increase your equity. Many lenders will allow this up to a certain value or percentage of what you owe.

If your situation means you need to move house - speak to your lender about your options, they may have schemes and packages for existing borrowers that can help.

Letting out your home and renting elsewhere until property prices rise might also be worth considering and discussing with your mortgage provider.

If you find yourself in negative equity or are having difficulty meeting your repayments, contact your lender who can give you advice and help you find a solution.

You may also want to think about getting impartial advice from the National Debtline.

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