Negative equity occurs when the market value of your property falls below the amount you still owe on your mortgage. For example, if your home is now worth £180,000 but your mortgage balance is £200,000, you are in negative equity by £20,000.
Negative equity most commonly happens when property prices drop after you have purchased with a small deposit, or during broader housing market downturns. It can also arise if you have borrowed additional funds against the property through a second charge or further advance.
Being in negative equity does not necessarily cause immediate problems if you can continue making your mortgage payments. However, it makes it very difficult to remortgage, move house or release equity. If you sell the property, the sale proceeds will not cover the mortgage, and you will still owe the difference to your lender.
If you are in negative equity but need to move, some lenders offer negative equity mortgages that allow you to port the shortfall to a new property. These are specialist products and not widely available.
Jack bought a flat for £200,000 in 2022 with a 5% deposit (£10,000), giving him a mortgage of £190,000. By 2024, local property prices have dropped 10% and his flat is valued at £180,000. His mortgage balance is now £185,000 after repayments, meaning he is in negative equity by £5,000. He cannot remortgage to a better rate because no lender will offer a loan above the property's value. Jack decides to stay put and continue paying his mortgage, expecting prices to recover.
Key Points
- You are in negative equity when your mortgage balance exceeds your property's market value
- It is most common when property prices fall after you have bought with a small deposit
- Negative equity makes it very difficult to remortgage, sell or move house
- You do not lose money unless you sell — if you keep paying, your equity may recover over time
- Some lenders offer specialist negative equity mortgages to help you move if needed