What happens if my mortgage is in negative equity?

Full answer

Negative equity most commonly arises after a period of falling house prices, particularly affecting buyers who purchased with a small deposit shortly before a market downturn, and understanding your practical options helps avoid panic. **How negative equity happens** If you bought with a small deposit (say 5-10%) and property prices subsequently fall, or if you have an interest-only mortgage where the balance is not reducing while prices fall, your outstanding mortgage balance can exceed what the property would sell for, putting you into negative equity. **It's not usually an immediate problem** If you can continue making your mortgage payments and have no need to sell or move, negative equity does not usually create an immediate practical issue -- your mortgage terms and monthly payments remain unchanged regardless of the property's current value, as long as you keep paying as agreed. **The problem arises if you need to sell** If you need or want to sell while in negative equity, the sale proceeds will not cover the full mortgage balance, meaning you would need to find the shortfall from savings or another source to fully repay the lender -- selling without being able to cover this gap is generally not possible without the lender's agreement to a shortfall sale, which can affect your credit record. **Remortgaging becomes harder** While in negative equity, remortgaging to a new lender or a new deal is typically very difficult, since new lenders assess loan-to-value based on current property value -- most borrowers in negative equity end up staying with their existing lender, sometimes on a reversion rate, until equity is rebuilt. **How negative equity typically resolves** Two forces gradually reduce negative equity over time: your regular mortgage payments reduce the outstanding balance (assuming a repayment, not interest-only, mortgage), and property values often recover over the medium to long term -- most negative equity situations resolve naturally within a few years if you can continue making payments without needing to sell. **Worked example** Someone bought a £200,000 property with a 5% deposit (£190,000 mortgage) shortly before a 10% market fall, leaving the property worth roughly £180,000 against a still-substantial mortgage balance -- putting them in negative equity of around £10,000-£15,000 depending on how much the mortgage balance has reduced through payments. If they continue paying and prices recover even modestly over the following 2-3 years, the negative equity is likely to clear. **Practical tip** If you are in negative equity and considering your options, speak to your existing lender about "porting" your mortgage (moving it to a new property while keeping the existing deal) if you need to move, since a straightforward remortgage to a new lender is unlikely to be available until your loan-to-value improves.

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