What is negative equity and why it could be a problem

However, if you had bought a property for £250,000 and have an outstanding mortgage balance of £220,000 but the property has fallen in value to £230,000, you would have £10,000 in home equity and not be in negative equity. 

It’s estimated there could be as many as half a million properties in negative equity in the UK, with some areas affected more than others.

Don’t worry if you aren’t sure if you’re in negative equity. You can do two simple checks that will help you get a clearer picture of your situation.  

1. Check your mortgage statement or contact your lender to find out how much you still owe on your mortgage. 
   
2. Check the value with your lender. When you bought your property your lender will have requested a valuation. This is linked to the House Price Index, which will factor in increases (or decreases) in your property’s value.  If this is short of what you are expecting you could challenge this with a RICS approved survey.  
   

If the value of your property is less than what you owe, then you are in negative equity.

Being in negative equity means you could find it hard to move house or get a new mortgage deal as the value of your asset is less than the amount you owe. However, it won’t directly affect your credit score. While your focus should always be to keep up to date with your repayments there are some extra steps to take if you find yourself in negative equity. Here’s what to do if this is your situation.

It can be difficult if you want to switch lenders by remortgaging. This is because new lenders will only lend against the current value of the property, so you could have a shortfall. This will likely reduce your options to shop around other lenders for a new fixed rate or a cheaper deal. 

However, you can speak to your current lender about getting a new mortgage deal from them: this is called a product transfer. This means sticking with your existing level of borrowing (not taking on extra debt) and switching to a new rate with the same lender. If you’re currently on a fixed rate that is due to end you can speak to your lender about a product transfer up to six months before. 

If you don’t opt for a product transfer, you’ll normally be automatically moved onto your lender’s standard variable rate (SVR).

If you’re in negative equity you might find it difficult to sell your home or move. Unless you have savings to repay the difference between the value of your home and the mortgage - which could be £10,000s - you will need to find a way to pay the shortfall to your lender.  

If you don’t have to sell and are able to remain in your property while continuing to meet your mortgage payments each month, negative equity may not affect your everyday finances.  

If you must sell your home and there is a chance the shortfall will cause you to fall into debt, you should seek advice straight away. Use our Debt advice locator tool to find free and confidential debt advice online, over the phone or near to where you live.

How easy it is to move will depend on several factors, such as: 

• how much negative equity you have 
  
• the value of the property you want to move to 
  
• if you are up-to-date with your existing mortgage, and 
  
• how much of a deposit you can raise for the new property. 

Talk to your lender in the first instance and find out what help they can give you.

A very small number of lenders offer ‘negative equity mortgages’, which let you transfer your negative equity to your new property, but you will still be expected to pay a deposit. But be warned - these often come with higher interest rates.

Use our Budget planner to draw up a budget and start to grow your savings. 

If possible, it’s a good idea to try and reduce your negative equity by paying extra towards your mortgage. This is called ‘overpaying’ and many lenders allow this.  

Firstly, check whether your existing mortgage will let you make overpayments and, if you can, how much you can overpay before you get an early repayment charge. 

Next, work out how much extra you can afford to pay every month or as a one-off. 

Check a mortgage overpayment calculatorOpens in a new window like this one from MoneySavingExpert.

This will tell you how much difference your extra payments could make. 

Several mortgage brokers and lenders also have this tool. 

Another option might be to rent out your home if your lender will agree to this. If your lender does agree, bear in mind that you may have to pay a higher interest rate and /or an annual 'Consent to Let' fee. You also have to tell your insurer that you’re renting out your home. 

While this would mean you keep the existing mortgage, it would also mean finding somewhere to live in the meantime. You would also remain responsible for meeting mortgage repayments if the property is ever vacant - which could put you in a worse financial situation. 

If interest rates rise, it’s important to make sure you can still afford your mortgage payments.

It’s particularly important if you’re in negative equity as you could be more vulnerable to having your home repossessed.

Always speak to your lender as soon as possible if you’re struggling try to continue to pay what you can. You can see more in our guide Help with mortgage payments.

If you are already in arrears on your mortgage, talk to your lender and get advice from one of the debt advice charities.

Useful links:

• in England and Wales, talk to Citizens Advice or Shelter
• in Scotland, talk to Citizens Advice Scotland or Shelter Scotland
• in Northern Ireland, talk to the Housing Rights Service