Negative equity: What is it and what can you do about it?

You may be looking to buy your first house. You may be paying off your mortgage.

Whatever stage you are in the home-owning process, you need to know about negative equity — and what can be done about it.  

 Negative equity can have a damaging impact on the financial wellbeing of homeowners.

But the better prepared you are, and the more you know about how to avoid your home falling into negative equity, the more likely you’ll be to weather the storm.

What is negative equity?  

In short, negative equity is when the value of your home falls below the remaining amount you owe on your mortgage.

Negative equity is usually caused by falling property prices, which are a hallmark of an economic downturn.  

Generally, buying property in the UK has long been seen as a safe long-term investment.

Since the financial crash in 2008 home values have risen significantly; as their value grows, so does their equity.

However, house prices can fall during periods of economic uncertainty or rising interest rates, and the risk of negative equity cannot be dismissed. 

How does negative equity work? 

Between 2007 and 2009 house prices fell by around 20%, leaving nearly one in ten mortgage holders in the UK in negative equity by the spring of 2009.

But how does it happen? The real-life example below outlines one scenario. 

Let’s say you bought a house worth £180,000, with a deposit of £20,000 and a mortgage of £160,000. Two years later, you have paid off £10,000 of that mortgage. But after getting your house revalued, it is now worth just £100,000. This new valuation means you still owe £150,000 of your mortgage on a house that is worth £100,000 — putting you in negative equity of £50,000.  

To find out whether or not you’re in negative equity, you simply need to: 

1. Check your mortgage statement or contact your lender, who will tell you how much you currently owe 

2. Ask an estate agent or surveyor to value your home 

If the value of the property is below what you currently owe, you’re in negative equity.  

How does negative equity impact homeowners?

Many people stand by the notion that buying a home is a long-term investment. And it’s true that generally, over time, house prices in the UK have risen.

Savills research shows the average UK house price entering 2000 was £88,466, compared with £329,988 in 2025, a rise of over 270% in 25 years. 

But house buying isn’t always a case of buying and holding. If you want to sell your home, then negative equity can spell trouble.

To make up the difference, you’ll have to use your savings as repayment to your lender, or else rent it out rather than sell it. 

Your lender may not grant you permission to arrange the sale if the likely return is less than your outstanding mortgage — and they may not let you rent it out either.

Similarly, you may be unable to remortgage your house with a new lender. In any case, you could end up stuck with your property — and its decreased value — if you can’t pay off the difference.  

How to avoid falling into negative equity

Although no one can predict the ins and outs of the housing market, or the shape of the wider economy, you can take some steps to help you avoid negative equity.  

The most effective way of doing so is to put down a large deposit when you purchase a house — as much as you’re able to afford.

The larger your initial deposit, then the less you’ll need to borrow, meaning the lower your mortgage will be. A lower mortgage will help you avoid negative equity on your property, even if its value decreases.  

You should also make sure that you’ve done your research before buying a property, on both location and the wider market.

Looking at property prices in the area that you’re planning to buy a house will give you a good insight as to whether you are paying over the odds.

And if the market is particularly ‘hot’, consider whether you’re able to delay for a period until activity begins to slow down. 

Can you sell a house in negative equity? 

By selling a house that is in negative equity you’ll be in breach of your mortgage terms, so your lender will first need to give you permission to sell up.

Selling a house in negative equity is rarely advised and is treated more as a last resort, since it is expensive and will see you losing money on what is possibly your largest asset.

If your lender does agree to you selling the house though, you’ll be billed for the shortfall. And if the repayments aren’t arranged appropriately, you may end up being taken to court.

However, if your lender won’t allow you to sell, then you will be unable to take your mortgage with you and buy a new home.  

It’s always worth being honest with your lender. You may end up being allowed to sell your property and pay back your outstanding mortgage in instalments with a customised repayment plan.  

Can you buy a house when in negative equity?

Selling a house while in negative equity means you won’t make a profit and will lose the deposit that you paid.

Therefore, it may prove difficult for you to buy a new property straight away. But to give yourself the best chance possible, you should do everything you can to ensure you keep making your repayments.

If you’re struggling to meet mortgage payments, lenders may be able to offer alternative options.

However, if you simply stop paying them, mortgage arrears will create a black mark on your credit record and may hinder your future house-purchasing power.  

What can you do about negative equity? 

Unless you’re planning to move house, or remortgage your property, then often the best advice is for you to sit tight.

Continue paying your mortgage repayments, which will continue to build up the equity you hold — although downturns happen and markets crash, history tells us that they always pick up again.

If your mortgage lender will allow it, you could even consider making over-payments during this period, as this will bring your loan down at a faster rate.

Mortgage rates are usually higher than savings interest, so it could be beneficial to put your cash into your mortgage loan.  

However, if you have no option but to move, then you’ll need to communicate openly and honestly with your lender about paying back the negative equity on your property. 

Get expert mortgage advice

Negative equity can be a stressful and unsettling experience, but it is important to remember that it does not have to mean financial disaster.

For most homeowners, the right course of action is to continue making repayments, avoid selling unless absolutely necessary, and allow time for the market to recover.

However, every situation is different, and if you are struggling with mortgage repayments or considering your options, speaking to a qualified mortgage adviser is strongly recommended.

A professional can assess your circumstances, liaise with your lender on your behalf, and help you find the most practical route forward.

Let Unbiased connect you with a mortgage adviser today.