What is negative equity?

Negative equity can leave people financially trapped in a home that’s no longer right for them.

The economy can create conditions where people are more likely to fall into negative equity, but there are things you can do to protect yourself.

Defining negative equity

Negative equity happens when the value of your home falls below the amount you owe on your mortgage.

For example, if you bought a property for £250,000 last year with a £15,000 deposit, you’d have taken on a mortgage of £235,000.

If you had a valuation carried out today and found your home’s value had fallen to £230,000, you could have an asset worth up to £5,000 less than what you owed on it.

Why does this matter? Well, if you’re happy to stay put and ride out dips in the property market, it doesn’t.

But if you’re looking to move it does because selling your house isn’t going to be enough to clear the mortgage. Negative equity can also make it harder to remortgage to get a better deal.

Who’s most at risk?

First time buyers typically contribute smaller deposits and borrow more. They end up paying more in interest on their mortgage for the first few years, which means they’re not able to chip away at much of the actual debt.

This leaves them especially vulnerable to dips in the housing market that can cause negative equity.

How can I reduce the risk?

House prices tend to only go up, but slumps can and do happen. They’re impossible to predict, but there are steps you can take to reduce your risk of negative equity.

If your mortgage allows for it, making overpayments can help you make some headway on the actual debt rather than just the interest. Chipping in a bigger deposit to begin with means you’ll have to borrow less. The less you borrow, the more severe the property price crash would have to be for you to fall into negative equity.

If things like this feel daunting, our expert advisors can help you find a mortgage you’re comfortable with. Click here to get started.

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