Negative equity is when a property is worth less than the outstanding mortgage secured against it. Selling at that point would not raise enough to clear the loan, leaving the owner with a shortfall to repay separately.
In one line: Negative equity is when a mortgage balance is larger than the current value of the property.
How negative equity works
Negative equity usually arises when house prices fall after purchase, especially on high loan to value mortgages taken with a small deposit.
A flat bought for 200,000 GBP with a 190,000 GBP mortgage falls in value to 175,000 GBP. The balance still owed is 188,000 GBP, so the owner is about 13,000 GBP in negative equity.
It can make moving or remortgaging difficult because there is no equity to carry forward, though staying put and repaying the loan gradually restores positive equity over time.
Negative equity vs equity
Equity means the home is worth more than the mortgage. Negative equity is the opposite, where the debt outweighs the value and a sale leaves money still owed.
Negative equity is most common with high loan to value lending in a falling market. Lenders rarely allow a house move or a new deal while a mortgage sits in negative equity, so many borrowers wait for values to recover.
Primary source: FCA: Mortgages and home finance