What Is Negative Equity?
If your home is currently worth £200,000 but you owe £230,000 on your mortgage, you are in negative equity of £30,000. The shortfall is the amount by which your debt exceeds your asset's value. Negative equity is not unusual during property price corrections — it affected hundreds of thousands of UK homeowners after the 2008 financial crisis.
Negative equity does not require you to take any immediate action if you can continue to service your mortgage. It becomes a problem when you want to move, remortgage to a better deal, or when you fall into payment difficulties.
What Causes Negative Equity?
- ▸Falling house prices: The most common cause — if prices fall significantly after your purchase, the value drops below your outstanding balance
- ▸High loan-to-value borrowing: Borrowing 90–95% of a property's value leaves very little equity buffer if prices dip even modestly
- ▸Additional secured lending: Taking a second charge or further advance against the property adds to total secured debt without necessarily adding value
- ▸New builds with a premium: New builds sometimes sell at a premium to their immediate resale value — buyers can enter negative equity as soon as they complete if the development oversupply pushes down values
How Negative Equity Affects Your Options
Remortgaging is the most immediately affected area. Mortgage deals are priced by loan-to-value (LTV) band — the higher the LTV, the higher the interest rate charged. If you are in negative equity, your LTV is over 100%, which means most lenders will only offer you a product transfer (switching to a new deal with your existing lender) rather than a competitive remortgage from the open market. This can leave you paying a higher rate than equivalent borrowers.
Moving house is difficult in negative equity because the sale proceeds will not cover your mortgage balance. You would need to make up the shortfall in cash — or negotiate with your lender to port the negative equity to your new property, which some lenders permit in limited circumstances.
What Are Your Options?
- ▸Stay and wait: If you can service the mortgage and do not need to move, waiting for property prices to recover is often the practical approach. Negative equity resolves itself as prices rise and you continue to pay down the balance
- ▸Overpay your mortgage: Making overpayments reduces your outstanding balance and therefore the depth of negative equity faster. Check your mortgage terms for overpayment allowances (typically up to 10% per year without early repayment charges)
- ▸Product transfer with your existing lender: When your fixed rate ends, ask your lender for a product transfer to a new deal without remortgaging. This keeps you with the same lender and avoids the LTV test that prevents open-market remortgaging
- ▸Negotiate a porting arrangement: If you need to move, speak to your lender about porting your mortgage — transferring the existing balance and terms to a new property. Not all lenders offer this, and approval is not guaranteed
When Negative Equity Becomes Serious
If you fall into mortgage payment arrears while in negative equity, the situation becomes significantly more serious. In negative equity, a lender who repossesses and sells the property will not recover their full debt. The remaining shortfall becomes an unsecured debt that the lender can pursue through the courts. This shortfall debt can persist for years after possession.
If you are struggling to pay your mortgage, contact your lender as early as possible. Most will offer temporary forbearance arrangements. Seek independent debt advice from Citizens Advice or StepChange Debt Charity. Do not ignore the problem — early engagement almost always produces better outcomes.
Frequently Asked Questions
Does negative equity affect my credit rating? Not directly — negative equity is not reported to credit reference agencies. However, missing mortgage payments, which may be a related cause or consequence, does affect your credit file significantly.
Can I sell my house if I am in negative equity? You can — but the sale proceeds will not cover your mortgage. You will need to make up the difference in cash, or your lender may agree to a shortfall sale. A shortfall sale requires the lender's consent and means accepting a debt for the balance after the sale.
How much house price decline creates negative equity? It depends on your LTV at purchase. A buyer who borrowed 95% only needs prices to fall by 5% to enter negative equity. A buyer who borrowed 75% could withstand a 25% price fall before reaching negative equity.
Is negative equity more common in certain property types? It historically affects new-build flats disproportionately because new builds are sold at a premium that evaporates as soon as the development is complete. Buyers who overpaid in inflated markets are also more vulnerable.
Will my lender let me know if I fall into negative equity? Most lenders do not proactively notify borrowers that their property value has fallen below their balance. You can estimate your equity position using current local sold prices versus your outstanding balance from your most recent mortgage statement.
Can I remortgage if I am in negative equity? Not through the open market in most cases, because no new lender will accept a greater than 100% LTV. Your best option is a product transfer with your existing lender, which they can usually offer at the same LTV level as your current balance.
Key Takeaways
- ✓Negative equity does not require immediate action if you can service your mortgage — but it limits your options
- ✓Product transfer with your existing lender is the practical remortgaging solution when in negative equity
- ✓Overpayments reduce the balance and the depth of negative equity faster
- ✓If you cannot service your mortgage while in negative equity, contact your lender immediately — shortfall debt from repossession is serious
- ✓High LTV borrowing and new-build purchases carry the greatest negative equity risk