The concept of negative equity can be a challenging one for homeowners and potential buyers alike, particularly in a turbulent housing market.
What causes negative equity?
If your property falls in value to below your outstanding balance, you have negative equity. Selling your home and remortgaging become more difficult if you have negative equity in your property. Negative equity can be caused by a number of factors, including:
High-LTV (loan-to-value) mortgages
A loan-to-value ratio represents the percentage of the property's value that is mortgaged. Homebuyers who opt for high LTV mortgages (smaller deposits) face a greater risk of negative equity, especially if property values drop soon after their purchase.
Market changes
One of the primary causes of negative equity is downturns in the housing market. When property prices decline due to factors such as economic recession or changing demographic trends, homeowners may find themselves in negative equity - as their house is worth less than the principal amount they owe on the mortgage.
Interest-only mortgages
The risk of negative equity may grow with interest-only mortgages. This is due to the fact that you do not build equity as you are not paying towards the principal amount; rather, you only ever pay interest on the amount you borrow.
At the conclusion of the mortgage term, your whole debt is to be repaid. You don't have equity in your home since you aren't paying off your principal mortgage amount, so a decline in property values may put you at risk if you can’t sell the property at the amount in which you owe to your lender, which means you may have to cover the shortfall.
What’s the problem with negative equity?
Difficulty selling the property
It may be difficult to sell your home if you find yourself in negative equity.
Difficulty remortgaging
It may be more difficult to switch to a different deal if you find yourself in negative equity - and so you’ll likely be moved onto your lender’s standard variable rate (SVR) which has the potential to be more expensive if interest rates are high.
How to resolve negative equity
If you find yourself in a situation where you have negative equity in your property, there are some things you can do to work yourself back into positive equity.
The best thing you can do if you find yourself in negative equity is to continue paying towards the mortgage and continue living in the property. As you continue making repayments, you carry on building equity, and you might also find that your property value rises alongside market conditions.
If you want more advice on improving the value of your property, check out the article below!
Need more help?
If you’re struggling to keep up with your mortgage repayments, it’s important that you let your lender know as soon as possible. You can speed this process up by speaking to us, as our expert advisers are in-the-know when it comes to the support options available to borrowers who might not be able to make their mortgage repayments.
Important information
Your home may be repossessed if you do not keep up repayments on your mortgage.
There may be a fee for mortgage advice. The actual amount you pay will depend on your circumstances. The fee is up to 1% but a typical fee is 0.3% of the amount borrowed.
You may have to pay an early repayment charge to your existing lender if you remortgage.
Related Articles
My house has increased in value, is now the time to remortgage?
How does remortgaging work?
