What is negative equity?

A quick summary


Equity is the value of your property that you own outright. Negative equity is when the value is less than the mortgage outstanding on the property. This is normally the result of falling house prices and could be in your area or across the country. It may also be worse during a recession, when house prices can fall more rapidly.

How it works

Working out equity on a property

To work out your equity, you’ll need:

  • a current valuation of the house 
  • a statement showing how much you still owe on your mortgage.

The equity you have in the property is the current value, less the outstanding mortgage still owed.

Here's an example

You buy a house and:

  • it costs £250,000 
  • you pay a £20,000 deposit
  • you take out a mortgage of £230,000.

After two years:

  • you’ve paid £10,000 off your mortgage
  • your mortgage is now £220,000.
  • but your house is valued at £200,000.

The negative equity is £20,000.

This is because the house value has dropped to £200,000 and you have a mortgage of £220,000.

Good to know

If you have negative equity in your home, it can mean that you would sell your home for less than the value of the mortgage.

When you sell the property, you still need to pay back your mortgage after the sale. Negative equity will leave a shortfall between the sale price and mortgage value. In this case, you’ll need to have money to pay the difference.

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.

Research the asking price

Check the market value for the property to make sure you’re paying a fair price.

Buy at the right time

It’s important to understand when property prices are high or low, to decide if it’s a good time to buy. Track house prices with the Zoopla property tracker.

Pay a bigger deposit

The larger your deposit, the more equity you’ll have in your property.

Avoid interest-only deals

By paying off your mortgage and not just the interest, you could increase the equity in your property.

 

What to do if you have negative equity

Try not to worry if you find yourself in negative equity. If it’s a small amount, this could just be down to a change to the housing market. Keep an eye on it and think about your options:

You could lose your home if you don’t keep up your mortgage repayments

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Important legal information

The content on this page is for reference and does not constitute finance advice.

For impartial financial advice, we recommend government bodies like the MoneyHelper.

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