Negative Equity Mortgage

Key takeaways 

• Negative equity occurs when the value of your home drops below the amount you owe on your mortgage 

• Selling or remortgaging can be challenging when in negative equity, and can incur additional debt or lead to higher mortgage payments  

• To escape negative equity you can wait for market recovery, continue to pay your mortgage to increase equity, or improve the value of your home 

What is negative equity? 

Negative equity is when you owe more on your mortgage than your home is currently worth.  This means that even if you sold your home, it wouldn’t bring in enough to pay off the mortgage and you’d still be in debt. 

How does negative equity happen? 

Negative equity normally occurs when a homeowner has a large mortgage on the home and the property then has a sharp drop in value. 

Say you bought a home for £100,000 with a mortgage of £80,000. If the housing market crashed and the property’s value dropped to £70,000, you would then be in negative equity because you owe more than the house is worth. 

While this might seem unlikely, it does happen. Property is like any other investment in that prices can go down as well as up. 

Another way to look at this is with a term banks use, called loan-to-value (LTV).

In the example above, the initial LTV would be 80% (£80,000 ÷ £100,000). If the property’s value falls to £70,000, the LTV rises to 114% (80,000 ÷ £70,000). 

Once the LTV rise above 100%, you’re in negative equity – you owe more than the home’s currently worth.  

Can I remortgage when I’m in negative equity? 

A lender will be unlikely to approve a remortgage deal because they would need to lend you more than your home is worth. 

This can leave homeowners feeling trapped, especially if your mortgage deal expires. You will then typically be moved to the lender’s standard variable rate. This often means payments will go up. 

Can I sell my home when it’s in negative equity? 

Selling your home when in negative equity will be costly. Because the sale price won’t cover the loan, you’ll still have outstanding debt to pay. 

This is likely to rule you out of buying a new home. But if you move to rented accommodation or choose to share with family, your lender might be prepared to set up a payment plan to clear the remaining debt. 

How can I get out of negative equity? 

There are a number of ways to get out of negative equity, but there isn’t one quick fix: 

What is a negative equity mortgage – and can I get one? 

Negative equity mortgages allow you to transfer the negative equity to a new home – in other words, your debt moves with you. 

Only a few specialist lenders offer negative equity mortgages and the interest rates are usually high. You might also face early repayment charges on your existing mortgage. 

What if I cannot afford my mortgage payments? 

If you cannot afford your repayments, contact your lender as soon as possible. They may be able to offer alternatives to help make the monthly payments more affordable. 

Don’t be tempted to stop all repayments as you’re likely to damage your credit report and might not be able to access credit in the future. This means you may not be able to easily buy another home. 

Under the worst-case scenario, your home will be repossessed. It will then usually be sold quickly and often below market value. 

The funds will be used to pay off your mortgage, but you will still be responsible for any shortfall. Avoiding this scenario should be your top priority. 

Being in negative equity does not necessarily affect your credit rating. The good news is that provided you’re able to keep up with mortgage repayments, your credit score won’t be adversely affected. 

Compare mortgage deals 

Whether looking to buy or remortgage your home, it’s important to make sure you are on the best rate possible. Compare mortgage deals and get free mortgage advice with MoneySuperMarket. 

Your home may be repossessed if you do not keep up repayments on your mortgage.