What is negative equity and how can you get out of it?

Key takeaways

• The impact of negative equity on a day-to-day basis. It usually does not affect day‑to‑day living or mortgage payments, but can become important when selling or remortgaging

• Causes of negative equity. Negative equity can result from falling house prices, reduced buyer demand or taking out a mortgage with a smaller deposit

• How to check for negative equity. You can compare your remaining mortgage balance with your property’s estimated value to see if you are in negative equity

• The impact of negative equity on selling. You can still sell, but if the sale price is lower than your mortgage, you will need to repay the difference to your lender

• Ways to respond to negative equity. Options may include staying in your current home and waiting for market conditions to improve, overpaying on your mortgage or making improvements to the property to increase its value

What is negative equity?

So, what is negative equity on a house? Negative equity occurs when your outstanding mortgage balance exceeds the value of your home. When this happens, the property is sometimes described as a negative equity home.

In most cases, it won’t affect your experience living in the property or your regular mortgage payments. However, it is important to be aware of negative equity if you’re considering selling, remortgaging or moving home.

Example of negative equity

Let’s take a look at an example of a home having negative equity:

• You buy a property for £350,000 and have an outstanding mortgage balance of £320,000

• The property has fallen in value to £300,000 during the time you’ve owned it

• Therefore, your negative equity would be £20,000

If you came to sell your property, you would need to repay the difference to your lender; in this case, it would be £20,000.

What causes negative equity?

Negative equity can be influenced by a range of factors, which can include:

• A fall in house prices during economic downturns

• Periods of reduced buyer demand

These factors are not directly in your control, so many homeowners may wait for better economic periods to sell or remortgage.

Deposit size can also contribute to negative equity. Mortgages taken out with smaller deposits may be more sensitive to short‑term price changes, as the outstanding mortgage balance is much higher. Mortgage balances tend to reduce more slowly in the early years of a loan, which may affect your equity levels during that time. Speak to a mortgage adviser to discuss whether a low-deposit mortgage is the right option for your circumstances.

How to check if you’re in negative equity

Checking whether your home is in negative equity involves comparing your remaining mortgage balance with an estimate of the property’s current value. You can contact your lender if you’re unsure how much is left on your mortgage balance.

Equally, your lender should be able to provide an estimated valuation based on recent sales in the area or through a professional valuation. Online valuation tools can also provide a general indication, although they are not definitive. If your property value is less than what you owe, you are in negative equity. If your property value is less than what you owe, you are in negative equity.

Can you sell a house in negative equity?

Selling a house with negative equity is possible, but it can involve extra costs. When your sale price doesn’t cover the remaining mortgage, you will need to repay the difference to your lender. This may involve using savings or other funds. In some cases, mortgage lenders may discuss alternative arrangements, depending on individual circumstances.

How to get out of negative equity

There is no single route out of negative equity, but it is useful to be aware of which approach may suit you. The options below outline common ways you can get out of negative equity.

Option 1: Stay in your home and wait

If it’s an option to stay put, remaining in your property while continuing to make mortgage payments can help to reduce your mortgage balance while waiting for property value changes. This can alter the equity position; however, it often depends on market conditions and personal circumstances.

Option 2: Overpay your mortgage

Where mortgage terms allow, making overpayments can reduce the outstanding balance quickly. Typically, you don’t pay interest on the amount you overpay. This may help narrow the difference between the mortgage and the property value, getting you out of negative equity sooner.

This option may not be right for you, so make sure to weigh up whether it is beneficial to keep the money in a high-interest savings account rather than overpaying. Overpayment limits, fees and flexibility depend on your specific mortgage product, so speak to your lender or an independent mortgage adviser for tailored guidance.

Option 3: Improve your property’s value

Certain improvements may increase your property’s market appeal and value. You may want to update your kitchen, improve your home’s energy efficiency with double glazing, or even make simple improvements to your front garden. While this costs money initially, it may help to add value to your home. However, it is not definite that this will increase your home’s market value significantly enough to get you out of negative equity.

Option 4: Renting out your home

Some homeowners may consider renting out a negative equity home while waiting for their equity position to improve. Rental income may help you to cover mortgage costs, but consent from the mortgage lender is usually required. Renting also entails legal responsibilities and ongoing costs that can vary over time, such as estate agent fees, maintenance and repairs.

Can you remortgage in negative equity?

Remortgaging with negative equity can be more limited than when a property has positive equity. Lenders use your property value to secure the loan, which may reduce the number of products available to you, as your loan-to-value (LTV) will be lower in a negative equity home. A product transfer may be preferable, where you stay with your current lender but switch to a different mortgage product. Speak to your lender or an independent mortgage adviser to find out more about what’s available to you.

How negative equity affects homeowners

For many, a negative equity home does not immediately change their living situation. Mortgage payments usually continue, and ownership of the home remains unchanged. The impact of negative equity can:

• Make moving home more difficult, as you will be expected to pay the difference between your outstanding balance and the current property value

• Reduce the range of mortgage products available if a homeowner looks to remortgage

Expert insight: why negative equity is often temporary

An expert from Barratt Homes outlined why negative equity can often be temporary:

“Negative equity can appear during periods of economic change or housing market adjustment. Over longer periods, house prices tend to move in cycles rather than in one consistent direction. For many, negative equity may change over time as mortgage balances reduce and market conditions shift. The length and impact of negative equity can differ depending on location, property type and wider economic factors.”

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Disclaimer:

This article is for general informational purposes only and does not constitute professional advice. Please speak with a mortgage, financial or legal adviser for more information regarding your specific circumstances.