A guide to negative equity

Equity refers to ownership. It is the true worth of your assets once any debts or liabilities are taken away. Therefore, negative equity is when the value of the asset that was used to secure a loan (such as shares in a business, ownership of a house etc.) is less than the remaining balance on the loan.

For example, shareholders' equity is the amount that would be returned to shareholders of a business if all the company's assets were liquidated and all its debts repaid. Negative shareholder’s equity (also called stockholders' equity) means that these liabilities and debts would exceed the assets. 

In the world of property, equity refers to the portion of a property that you own. A home that is in negative equity is a property whose market value is less than the mortgage secured on it. This is normally the result of falling property prices.

For example, if your house was worth £300,000 when you began your mortgage, but over time it's market value fell to £250,000, then your property would be in negative equity. Negative equity doesn’t necessarily mean that your house is worthless and has no value, often it is simply that it's market value is less than what you bought the property for originally.

There are four ways to minimise your negative equity:

• Use your savings to repay the difference between the value of your home and the mortgage
• Overpay your mortgage repayments
• Rent out your property (although not all lenders will agree to this option), assuming that rental income will cover mortgage repayments
• Hold out and wait for the value of your property to recover

If you are looking to move home but have negative equity, it can feel like you are locked into your current property. But it is possible to move house with negative equity, although this depends on various factors:

• How much negative equity you have
• The cost of the property that you want to move to
• How up-to-date you are with your existing mortgage payments
• Whether you can raise a deposit for the new property

To find out if you can move with negative equity, talk to your lender and find out how they can help. In some instances, lenders may offer a ‘negative equity mortgage’, which will transfer your negative equity to your new house. However, this is not common as very few lenders offer them.