Finance⏱ 5 min read
What Is Negative Equity and How Do You Calculate It?
Negative equity occurs when your home is worth less than the mortgage you owe. Here is how to check if you are in it, what options are available, and the key risks to understand.
Negative equity is particularly common after house price falls or when buyers put down small deposits and prices dip shortly after purchase. Understanding the numbers helps you decide how to respond.
Calculating Your Equity Position
Equity = Current property value - Outstanding mortgage balance
Positive equity: property worth MORE than you owe
Negative equity: property worth LESS than you owe
Example 1 (positive):
Property value: £280,000
Mortgage balance: £195,000
Equity: £85,000 = 30.4% equity / LTV 69.6%
Example 2 (negative equity):
Property value: £195,000 (fell from purchase price of £240,000)
Mortgage balance: £216,000 (bought with 10% deposit of £24,000)
Equity: -£21,000 (negative)
Negative equity of: £21,000
How Negative Equity Happens
Scenario: Bought at peak, small deposit
Purchase price: £240,000
Deposit (10%): £24,000
Starting mortgage: £216,000
House prices fall 20% (£240k to £192k):
Property value: £192,000
Mortgage balance (after 2 years of payments): ~£207,000
Equity: £192,000 - £207,000 = -£15,000
Most vulnerable:
- Buyers with 5-10% deposits when prices have little buffer
- Interest-only mortgages (balance doesn't reduce)
- Properties bought in areas with volatile prices
Implications of Negative Equity
- Remortgaging: Lenders won't offer you new deals if you're in negative equity — you're stuck on your existing rate (often the lender's Standard Variable Rate, which is expensive)
- Moving house: You can't sell without covering the shortfall from savings — you'd need to repay the full mortgage plus pay the difference
- Borrowing additional money: No lender will offer further advances against a property in negative equity
- Staying put: If you can afford the monthly payments and don't need to move, negative equity matters much less — property values typically recover over time
Negative Equity Position Over Time
If you stay put and make payments, equity improves from two directions:
1. Mortgage balance reduces (capital repayment)
2. Property value (hopefully) recovers
Capital repaid in year 1 (£200k mortgage at 5%):
Monthly payment: ~£1,170 (25yr term)
Interest: £200,000 x 5% / 12 = £833/month
Capital: £1,170 - £833 = £337/month = £4,044/year
After 3 years:
Capital repaid: ~£13,000
Property value needs to rise by only £2,000 to clear £15k deficit
(At £4,333 per year capital paydown, patience resolves most
modest negative equity situations within 5-7 years)