What is negative equity and how you can pay it off?

Property is in negative equity if it’s worth less than the mortgage secured on it. Negative equity is often caused by falling mortgage prices. If you bought a property for £150,000 with a mortgage for £120,000 and the property is worth £100,000, you would be in negative equity. 

On the flip side, if you bought a property for £150,000 with a mortgage for £120,000 and it’s now worth £130,000, you would not be in negative equity. 

It’s estimated that there are around half a million properties in negative equity in the UK, although some areas are affected far more than others. 

How can I check if I’m in negative equity?

First of all, ring your lender to find out how much you owe now. Next, get a local estate agent or surveyor to value your home, if the value of the property is below what you owe, then you are in negative equity. 

Problems with negative equity 

If you want to sell your home, negative equity is more of an immediate issue. If you have savings to pay the difference between the value of your home and your mortgage that will help, but if not you might find it difficult. 

Most lenders won’t lend to you, making it difficult to remortgage to a fixed rate or cheaper deal. Instead, you will normally be moved onto the lender’s standard variable rate. 

How can you move house if you’re in negative equity? 

Whether you can move house if you’re in negative equity depends on several factors. Like, how much negative equity you have, the value of the property you want to move to, and how much if a deposit you can raise for the new property. 

Talk to your lender and find out what help they can give you. A very small number of lenders offer a negative equity mortgage. This will let you transfer your negative equity to your new property, but you will still be expected to pay a deposit.  

The pros and cons of negative equity 

Positives

  • You can move house without having to pay off the negative equity on your mortgage. This is particularly useful if you need to move for work or family reasons and can’t put it off.

Negatives

  • You might have to pay early repayment charges on your existing mortgage.
  • There might be extra fees and charges, and your new mortgage might have a higher interest rate than your existing one.
  • Very few lenders offer them.

Reducing negative equity 

When tackling negative equity it’s a good idea to try and reduce your negative equity by overpaying your mortgage. Step one, check whether your existing mortgage allows overpayments. If so how much can you overpay without incurring an early repayment charge? Step two, work out how much extra you can afford to pay every month or as a one-off.

If you’re in negative equity another option might be to rent out your home. would mean you keep the existing mortgage, although you will probably have to pay a higher interest rate.