Negative Equity

What is negative equity?

When you buy a property, the money you put forward in the form of a deposit is known as your equity. If the value of your home goes up, so does your equity.

If the money you borrow to buy your home (your mortgage) ends up being higher than the value of your property, this is called negative equity. This can happen if house prices fall.

How can negative equity affect you?

Being in negative equity can impact your mortgage, finances and future plans. It could make it difficult to sell your home, switch rates with your current provider, or remortgage with another provider.

Another lender might not be able to lend more than your property is worth, and your existing lender might not have rates available for your Loan-to-Value (LTV). Your LTV is the ratio of your property’s value to how much you’ve borrowed to buy it.

You also might not be able to borrow more against your home, as you already owe more than your home is worth. If you have an interest only mortgage, this can have a bigger impact, as you’re not reducing the balance over time.

What do you need to do if you’re in negative equity?

Negative equity might seem scary, but its impact on you all depends on your current situation and future plans.

If you’re staying put

If you don’t plan to sell your house or borrow more money against your home, negative equity won’t necessarily affect you or your day-to-day finances. Just make sure you continue to make your mortgage payments on time each month.

When your current deal ends

When your current deal ends, you’ll usually move onto your lender’s Standard Variable Rate (SVR). We recommend reaching out to your lender to discuss the different options available to you. You may be able to get a better rate by remortgaging with another provider, but some lenders might not offer you a deal if you’re in negative equity.

If you need to move home

If you need to move home, you’ll be responsible for making up any shortfall in your mortgage repayment. Consider if you could afford to do this, and what impact it could have on your next purchase. To see the options available to you, speak to your lender.

How do I avoid getting into negative equity?

If you’re concerned about negative equity or falling property prices, there’s a few things you should consider.

If you’re looking to purchase a home

• Think about your deposit. The bigger your deposit, the more room you have for prices to fall without getting into negative equity.
• Shop around and do your research to ensure you’re not overpaying for a property.
• Interest only mortgages are at higher risk of Negative Equity because your payments don’t reduce the balance. If you’re considering an interest only mortgage, think about whether a repayment mortgage might be more suitable.

If you already own your property

• Keep shopping around for the best rates to make sure you’re on the best deal
• If you can afford it and your mortgage allows it, make unlimited overpayments where possible
• Keep up with your standard payments