Negative equity explained

What is equity?

Simply put, it’s the difference between the current value of your home and the amount you owe on your mortgage. If the value of your home goes up, the amount of equity you’ll have will also go up and vice versa.

If you have equity in your home, you may be able to use it to borrow more for things like home improvements.

Working out how much equity you have

First you’ll need to check with your lender to see how much you owe on your mortgage. Then use an online valuation platform or ask a local agent to value your home. Now all you need to do is take away the amount you owe from the valuation.

For example, if the amount you owe is £150,000 and your home is valued at £175,000, your equity is £25,000.

What is negative equity?

This means the amount you owe is more than the value of your home. Negative equity usually happens if there’s a big drop in house prices in your area or nationally.

For example, if the amount you owe is £150,000 and your home is now valued at £145,000, you’re in negative equity by £5,000.

What you can do about negative equity

The first thing is not to worry. As long as you keep making your monthly mortgage payments, in time you might come out of negative equity again, either because:

• the value of your home goes up again
• you’ve reduced the amount you owe below the value of your home.

If you’re thinking of making a change, here’s how negative equity might affect your plans:

• switching rates: some lenders, including first direct, will let you do this even if you’re in negative equity
• borrowing more: you wouldn’t be able to do this with most lenders as you’ll already owe more than your home is worth
• moving home: can be more difficult as the sale price might not cover the amount you owe, so you may need to cover the difference from your own money.

How to build equity in your home

If you have a capital repayment mortgage, every payment you make will help build up the equity in your home and if you can make overpayments too, it’ll build up even quicker.

If you have an interest only mortgage, making your monthly payments alone won’t build up your equity, but making overpayments when you can afford to will. Before you do, it’s always worth checking if you can make overpayments and how they work with your provider.

If you’re looking to move or buy your first home, you can help reduce the risk of negative equity by thinking carefully about the property you buy and how much you pay for it. It’s also worth bearing in mind that the more money you can put down as a deposit the more equity you’ll have to start with, which can help cushion any possible fall in house prices later.