What happens to your mortgage if your house value drops

What is negative equity?

A property is in negative equity if it’s worth less than the mortgage you have on it, and it’s normally caused by falling property prices.

For example, if you bought a property for £150,000, with a mortgage for £120,000 and the property is now worth £100,000, you would be in negative equity.

However, if you had bought a property for £150,000 with a mortgage for £120,000 and it’s now worth £130,000, you would not be in negative equity.

It’s estimated there’s around half a million properties in negative equity in the UK, although some areas are affected more than others.

How do I know if I’m in negative equity?

You might not know whether or not you’re in negative equity.

First of all, check your mortgage statement or contact your lender to find out how much you owe now.

Next, ask a local estate agent to value your home or hire a surveyor to do a valuation (they will charge for this).

If the value of the property is below what you owe, then you are in negative equity.

Problems that come with negative equity

It’s an immediate problem if you want to sell your home.

Unless you have savings that you can use to repay the difference between the value of your home and the mortgage, you might find it difficult to move.

It can also be difficult if you want to remortgage; if you want to save money by getting a fixed rate or a cheaper deal.

Most lenders won’t let people with negative equity switch to a new mortgage deal when their existing one ends.

Instead, they’ll normally be moved onto the lender’s standard variable rate (SVR).

Moving house if you’re in negative equity

How easy it is to move will depend on several factors, such as:

• how much negative equity you have
• the value of the property you want to move to
• if you are up-to-date with your existing mortgage
• how much of a deposit you can raise for the new property.

Talk to your lender in the first instance and find out what help they can give you.

A very small number of lenders offer a ‘negative equity mortgage’.

This will let you transfer your negative equity to your new property, but you will still be expected to pay a deposit.

Pros and cons of negative equity mortgages

Pros:

• you can move house without having to pay off the negative equity on your mortgage. This is particularly useful if you need to move for work or family reasons and can’t put it off.

Cons:

• you might have to pay early repayment charges on your existing mortgage
• there might be extra fees and charges, and your new mortgage might have a higher interest rate than your existing one
• very few lenders offer them.

Reducing your negative equity

Use our Budget Planner to draw up a budget and start to grow your savings.

If possible, it’s a good idea to try and reduce your negative equity by overpaying your mortgage.

Firstly, check whether your existing mortgage will let you make overpayments and, if you can, how much you can overpay before you get an early repayment charge.

Next, work out how much extra you can afford to pay every month or as a one-off.

Check a mortgage overpayment calculator like this one from MoneySavingExpert

This will tell you how much difference your extra payments could make.

Several mortgage brokers and lenders also have this tool.

Renting out your home if you are in negative equity

Another option might be to rent out your home if your lender will agree to this.

This would mean you keep the existing mortgage, although you will need permission from your lender and may have to pay a higher interest rate and /or an annual 'Consent to Let' fee.

You also have to tell your insurer that you’re renting out your home.

How to prepare for an interest rate rise

Interest rates are currently very low.

But if interest rates rise, it’s important to make sure you can still afford your mortgage payments.

It’s particularly important if you’re in negative equity as you could be more vulnerable to having your home repossessed.

What you can do if you’re struggling to pay your mortgage

If you are already in arrears on your mortgage, talk to your lender and get advice from one of the debt advice charities.

Useful links:

• in England and Wales, talk to Citizens Advice or Shelter
• in Scotland, talk to Citizens Advice Scotland or Shelter Scotland
• in Northern Ireland, talk to the Housing Rights Service
  

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