Negative equity refers to the situation where the outstanding balance of your mortgage is more than the current market value of the property.

It means that if you sold your property, you would not be able to fully pay off the mortgage from the proceeds. Negative equity can occur when property prices fall, meaning that the value of the property is now less than when it was purchased.

For example, if you bought a house for £300,000 with a deposit of £40,000 and a mortgage of £260,000 and the value of the house then dropped to £200,000, you would be in negative equity because you would owe more on the mortgage than what the house is currently worth. Even if you were to sell the house you would still owe the lender £60,000 and the equity you built up from your deposit would be completely wiped out.

Clearly, being in negative equity can create issues if you want to sell your home or re-mortgage, as the sale of the property would not cover the full amount owed on the mortgage. In some cases, lenders may allow for a short sale, where the property is sold for less than the amount owed on the mortgage, but this depends on the lender’s policies and the specific circumstances.

First time buyers are at an increased risk of negative equity because of the smaller deposits available to put down on a property.