In this guide
UK house prices have fallen for the fourth month in a row, according to the Halifax house price index.
The average UK property now costs £285,000 – down 2.4% on this time a year ago and down 0.3% month on month.
With interest rates continuing to climb in order to bring down the soaring cost of living, are we heading for a housing crash? And could that leave you in negative equity?
In this article, we will explain:
- What is negative equity?
- What will happens to my mortgage if house prices fall?
- Can I remortgage if I’m in negative equity?
- Should I sell if I’m in negative equity?
- What if I have to move when I’m in negative equity?
- Is there a way to reduce the risk of negative equity?
Related content: When will house prices fall?
What is negative equity?
Negative equity is when the value of your home is worth less than the amount you have still to pay on your mortgage.
For example, you bought a house for £300,000 with a deposit of 5% (£15,000), meaning the bank advanced you a £285,000 loan.
If a year later, the value of your property dropped 10% to £270,000 you would be in negative equity.
It sounds bad, but negative equity is only really an immediate problem if you:
- Are looking to sell your home now
- Want to remortgage with a new lender
- Have got so far behind with the mortgage payments that the lender repossesses your property. It then has to sell it quickly for less than what you originally paid for it, which means you would still be in debt.
If you are wanting to understand more about the different types of mortgages available and which is right for you, then check out our article.
What happens to my mortgage if house prices fall?
Experts predict that house prices will fall by around 5% in 2023 due to the soaring cost of living combined with rising interest rates making mortgage repayments more expensive.
What will happen to your mortgage, if house prices do fall by that amount, will depend on the type of deal that you are on.
- Part way through a fixed-rate mortgage deal – Both you and your borrower commit to set repayments typically for a period of two, three or five years. Falling house prices will have no impact on your finances until you come to the end of your deal and need to look for a new one. You will continue with the same monthly mortgage payments.
- Still on a tracker deal – A tracker mortgage follows movements in the Bank of England base rate. The cost of your mortgage might go up or down during the term of the deal. Right now, it will be increasing as interest rates are going up.
- On a lender’s discounted variable-rate deal – This can change at any time at the lender’s discretion, so your mortgage may go up or down.
Remember: the value of your property won’t itself be an issue as long as you can afford to keep up the repayments should rates rise.
How do I know if I am in negative equity?
If you want to get an idea of how much your property is worth and how much equity you have in it, you could ask a local estate agent to value your home. Or you could use a property search website to compare prices in your area.
To find out how much you owe on your mortgage, contact your lender or check your online account.
However, if you are happy living where you are and you can keep up with the current monthly repayments, you don’t have to do anything.
It is likely you will be out of negative equity at some point in the future.
Remortgaging while in negative equity
Where you could face difficulties is when your current fixed deal expires and you come to look for a new mortgage if you are in negative equity.
Lenders typically won’t take on new customers in this situation.
Selling a home while in negative equity
Selling your house while in negative equity should not be taken lightly. It should only be considered in urgent cases or if you are in severe financial difficulty. First check if there is any other alternative open to you.
Usually, the best thing to do is keep up with your monthly mortgage payments, if you are able, and wait for the market to recover.
When the value of the property resumes its ascent, or when you have paid enough off the mortgage and you get back into positive equity, it can be a better time to look at selling again.
You could explore the option of moving while renting out your existing property until the market has recovered.
You could also contact your mortgage lender to see if there is anything that can be done.
Moving while in negative equity
If you urgently need to sell or move home but the sale price is not enough to repay the mortgage then you will need your lender’s permission to proceed. They may allow you to sell your home and repay the shortfall over time.
A few lenders will give you the option to transfer the negative equity to another property but this is not common and you will likely need an excellent payment record.
You could also allow your home to be repossessed or declare bankruptcy. But both these options should be a last resort, as you will get even less from the sale of the property and will end up owing more to your lender.
Your credit score will also be damaged for a number of years and you will face other significant financial complications.
Reducing the risk of negative equity
One of the best ways to reduce the risk of negative equity is to put down a bigger deposit so you are borrowing less through a mortgage. You could aim for above 15% of the property’s purchase price.
If house prices fall, the chance of your property’s valuation falling below the balance on your mortgage is reduced.
Also thoroughly research the area where you are planning to buy to check that you are not overpaying for a property.
Remember though that it can be difficult to calculate a property’s true value as the price is determined by how much people are willing to pay for it.
Overall, the UK property market has been growing since the aftermath of the financial crisis, and at some pace since the onset of the coronavirus pandemic.
Find mortgage deals with our best buy tool
This is how the tool works:
- You can search and compare mortgage deals
- It only takes a couple of minutes and no personal details are required to search
- Once you’ve got your result, you can speak to a mortgage broker if you need advice
How to get out of negative equity
If you are in negative equity, typically the best thing to do is keep up with your monthly mortgage payments and hope the property market recovers in time.
If you are on a repayment mortgage, the amount you still owe your lender will continue to fall. And at some point you will be out of negative equity even if the wider market hasn’t recovered.
You could also use savings to pay off some of the mortgage, so reducing the size of your loan.
Most lenders allow you to pay an extra 10% of your mortgage each year without imposing any early repayment charges.
Help and further information
If you are worried about negative equity, and are struggling to keep up with your monthly mortgage payments, you may want to contact your lender in the first instance.
The organisations below can also offer guidance and support.
Important information
Some of the products promoted are from our affiliate partners from whom we receive compensation. While we aim to feature some of the best products available, we cannot review every product on the market.
