Negative equity and what to do

Equity is the value of the property less any money that you owe that is secured against it and so negative equity is where the property is worth less than the mortgage you have on it.

So, for example, if you bought a property for £100,000 and have a mortgage on the property for £90,000 and that property is now worth £80,000, the amount you owe of £90,000 is £10,000 less than what it is worth, so you would have a negative equity of £10,000.

If you are a selling a property with negative equity, you will need to discuss the sale with your mortgage lender as you cannot sell the property at a price lower than the money you owe on it unless you have a mechanism to pay the money back. If you try to do so the lender can prevent you from selling during the conveyancing process.

With changes in the market and a general rise in property prices, a negative equity situation may not be permanent and so you may not be stuck forever.

If you want to sell and get out of the negative equity trap you could consider:

  • Paying off some of the loan before you sell, using other savings, so that the loan is less than the property value and the property no longer in negative equity
  • Taking a loan to cover the shortfall between the sale price and the loan value, the risk here is that the cost of the loan may be high
  • Make improvements to your home to raise its value, thus reducing the amount of negative equity.
  • Stay put and wait for the market to improve, so the value of the property increases and the negative equity reduced
  • Get consent to rent out your property and then rent a property for yourself in a lower priced area to give you the opportunity to save some money to pay down the debt. Mortgages for landlords are generally more expensive than an owner-occupier mortgage so there may be additional costs if your lender gives you ‘consent to let’.

If, however, you need to sell, the first thing would be to speak to your lender as they may agree for you to do so, particularly if you are in a situation where your home might otherwise be repossessed. There may be specific requirements, such as using an approved agent to sell it and you would need to provide them with evidence as to the market value.

There are some negative equity mortgage products which will allow you to carry the shortfall over to a new home and slowly repay the debt, but these are generally expensive and only available where you have a specific reason to move, such as relocating for a new job.