What is Negative Equity?

Equity is the value of your property you own outright or the amount of your mortgage which has been repaid. Negative equity refers to when the value of your property is less than the remaining sum on your mortgage. Usually, most people are in negative equity due to a drop in property value. It is important to keep an eye on your equity, this can be calculated by:

Current Property Value – Outstanding Mortgage Amount = Equity

Negative equity tends to be a larger problem when there is a recession as this usually accompanies a drop in property prices.

Interest Mortgages:

Interest only mortgages tend to have an increased risk of negative equity. This is because you only pay the interest due rather than the amount borrowed. The full sum owed is then repaid at the end of the mortgage term. As you are not paying off your mortgage, equity is not built in your property.

How do I avoid negative equity?

• Property Price – Are you paying a fair and reasonable amount for the property in line with current market value? It may be worth researching this prior to purchasing a property.

• Financial Market – This is dependent upon when you purchase your property. Are property prices and interest rates considerably high?

• Avoid Interest-Only Mortgages – As covered above, you do not build equity.

What shall I do?

If your property is only in negative equity by a minor amount, try not to worry. There are several options to regain positive equity:

• Continue – Continue to make your repayments as you would each months and wait for equity to accrue. Although this is a long term option, it is ideal for those who are not considering moving property and do not have the option to make larger payments. .

• Overpayments – Making larger overpayments will reduce how much you owe overall on your mortgage.

If you or someone you know is struggling with paying their mortgage, we recommend consulting with the National Debt Helpline or the MoneyHelper.