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What is negative equity?

Who is this page for?

This page is for people who want to understand more about negative equity. You may be paying off a mortgage, or a first-time buyer who wants to understand negative equity before getting a mortgage. If you’re an existing customer who’s worried about negative equity, go here

What is negative equity?

Negative equity is when your property becomes worth less than the remaining value of your mortgage. To be in negative equity, the value of your house must fall below the amount you still owe on your mortgage.

How to work out your equity

Equity is the value of your property that you own outright. To work out your equity, you’ll need to know:

  • The current value of your house by getting a valuation.
  • How much you still owe on your mortgage.

Current value of your property minus outstanding mortgage amount equals your equity in the property. 

How does negative equity happen?

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. 

A graphic showing how to work out negative equity - please see the explanation in body text for more information.

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.

How to find out if you are in negative equity

You can find out whether you are in negative equity by following these steps:

  1. Make an appointment with your lender or speak to them on the phone.
  2. Ask them how much money is owed on your mortgage.
  3. Arrange a valuation with your provider.
  4. Get your housed valued.
  5. Compare the valuation and the amount you owe.

If the value of your property is less than the amount you owe on your mortgage, you are in negative equity. 

How you may be able to avoid negative equity

If you’re thinking of buying a house and want to protect yourself against negative equity, here are some steps that could help:

  • Question the asking price Are you paying the market value for the property? Research online and speak to experts to get an idea if you’re paying a fair price.
  • Buy at the right time Prices for the same property can change depending on when you buy. Understanding when property prices are high or low can help you decide the best time to buy.
  • Pay a bigger deposit The larger your deposit, the more equity you will have in the property. This can make it less likely that you will fall into negative equity.
  • Avoid interest-only deals These mean the equity in your property could potentially remain low.

What should you do if you have negative equity?

Try not to worry if you discover you’re in negative equity – if it’s just by a small amount, changing house prices may move you back into positive equity. You have a few options to try and get back into positive equity:

Continue as normal

Continue making repayments as you normally would and wait for equity to build. This is a long-term option for people not thinking about moving house.

Overpay your mortgage

Paying more than your agreed monthly mortgage payments can reduce how much you owe more quickly. Find out more about overpayments.

Financial advice could help you with negative equity

It can be worrying to find out you have negative equity – financial advice may be able to help. We recommend the National Debt Helpline or the Money Advice Service.

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.

Calculators & tools

We have a range of mortgage calculators to help you:

  • Find out how much you could borrow from Lloyds Bank
  • See how much you could save if you make overpayments on your mortgage
  • Get an idea how a change to the Bank of England Base Rate could effect your monthly payments

Use our calculators and tools >

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