People often find themselves in negative equity due to falling house prices. When prices fall, the number of households in negative equity tends to rise. It’s a bigger problem during recessions, when house prices can experience bigger drops.
For example, house prices fell by around 20% between 2007 and 2009, during the global financial crisis. This meant that almost 1 in 10 people who held mortgages in the UK were in negative equity by spring 2009.
Negative equity example
Bill bought a house worth £180,000. He did this with a £20,000 deposit and a mortgage of £160,000.
After two years of living in the property, he’d paid off £10,000 of his mortgage.
He got his house valued again – and found that it was now worth £100,000.
This valuation put him in negative equity of £50,000. He still owes £150,000 of his mortgage on a house that’s now worth £100,000.
Interest-only mortgages
Interest-only mortgages can increase the risk of negative equity. This is because you only ever pay the interest on the amount you borrow, rather than repaying the mortgage sum.
The total amount you owe is repaid at the end of the mortgage.
Because you’re not paying off your mortgage amount, you don’t build equity in your property, so a fall in property prices could put you at risk.
Moving home and negative equity
Negative equity can mean selling your home for less than the value of the mortgage you took out to buy it.
This is because you’ll have an outstanding amount of money on the mortgage that you have to pay back after the sale. If you don’t have savings or other funds available, it may be difficult to pay this and it may not be easy for you to sell your house.
Paying more than your agreed monthly mortgage payments can reduce how much you owe more quickly. Find out more about overpayments.
The content on this page is for reference and does not constitute finance advice.
For impartial financial advice, we recommend government bodies like the Money Advice Service.
Lloyds Bank plc. Registered office: 25 Gresham Street, London EC2V 7HN. Registered in England and Wales No. 2065. Lloyds Bank plc is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority under registration number 119278.
Telephone calls may be monitored or recorded in case we need to check we have carried out your instructions correctly and to help us improve our quality of service.