Negative equity describes a scenario whereby the value of the outstanding mortgage on a property is worth more than the current market value of that property. This usually happens when property prices dip. The situation makes it far harder to sell your property, since you would owe more than the amount you would receive if you sold it.
For example, let’s assume you bought your property for £250,000 with a mortgage of £225,000. Property prices fall over time and your property is now worth around £200,000. If your mortgage remains above that level, for example at £220,000, you would be in negative equity. If you sold your property, you would need to repay the bank the remaining mortgage of £220,000. Since you would only receive £200,000 from your house sale, you would need to find the £20,000 difference from elsewhere to pay back the amount you still owe. Hence why many people in negative equity end up remaining where they are in the hope property prices will rise again.
You will also find it very tricky to move onto a different loan if your existing deal runs out. Few lenders would be happy to allow you to switch loans when you are in negative equity. This means you could end up with higher monthly payments that would complicate the situation further. There is a possibility you could get a negative equity mortgage (a loan specifically designed for this situation), but they are rarities on today’s market. The best way to escape is to make additional mortgage payments if you can. These would clear more of your debt faster and return you to positive equity sooner. Rising house prices would also help if the market changes once more.