Negative Equity

Negative equity usually happens when property prices fall after a purchase, especially for buyers who borrowed a high proportion of the price.

For example, a homeowner owes 300,000 on their mortgage, but their home is now worth only 280,000. They have negative equity of 20,000. If they sold, the sale would not cover the mortgage, and they would need to find the difference.

Negative equity does not cause problems as long as the owner can keep making payments and does not need to sell. However, it makes it difficult to move house, switch to a better mortgage deal or borrow more against the property. Lenders may refuse to remortgage someone with negative equity, leaving them on a higher rate.

Negative equity was widespread in the United Kingdom in the early 1990s and in the United States, Ireland and Spain after the 2008 financial crisis. In the US, where some mortgages allow borrowers to walk away with limited further liability, high levels of negative equity contributed to defaults. Larger deposits reduce the risk of falling into negative equity.