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Many people see buying a home as an investment in their long-term financial future.
This is because home values in the UK have risen significantly since the financial crash of 2008. As the value of the property grows, so does the share of the property you own - known as your 'equity'.
But like any investment, there's no guarantee of growth. House prices have decreased at various times in the UK - and if this happens while you own a property, it may be worth less than what you owe on your mortgage, a situation known as 'negative equity'.
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When you first buy a property with a mortgage, your equity will be the deposit you put in - for example, if you buy with a 20% deposit, your equity will be 20% of the home's value.
Your equity can increase in two ways:
So, to work out your equity, take the amount the property is currently worth, then subtract the outstanding loan on your mortgage - which will be the original price you paid, minus your deposit and repayments.
Equity = current value minus outstanding mortgage loan amount
If this amount is below zero, your property is currently in negative equity.
Say you buy a £200,000 home with a £20,000 deposit and a mortgage of £180,000.
After five years, you may have seen the property value increase by 25% to £250,000. You've also repaid £25,000 in that time, meaning your outstanding loan is now £155,000 - so your equity would be £95,000.
But if prices decreased by 25%, your home would now be worth £150,000, even though you still owe the bank £155,000. In this situation, you would be in negative equity by £5,000.
Home values fluctuate, so don't panic if average prices in your area drop by a percentage or two.
Even if your property's value decreases slightly, it would need to drop by more than the amount you've paid in deposit and repayments for you to be in negative equity.
That said, market crashes can happen. Following the financial crisis of 2008, the average house price in England fell from £188,657 to £159,340 - a drop of 15% in one year.
Of course, an average price is a guideline only, and may not reflect house price activity in a particular area or even street.
If home values in your area do decline, you'll be most at risk in the following circumstances:
Find out more: how much is your house worth?
Being in negative equity can put you in a tricky financial situation.
If you were to sell your property, you wouldn't make enough to repay your outstanding loan to the bank and would continue to owe money.
If you wanted to remortgage, the lender would be unlikely to approve a new deal, as your property would not be sufficient security. This means you'll likely be stuck on the lender's standard variable rate when your deal expires.
That said, negative equity won't necessarily impact on your credit score, unless you default on your payments or need to move house and cannot make up the shortfall.
If you're able to stay in your property and continue meeting your mortgage payments each month, negative equity may not affect your everyday finances.
The options available to you, if you've fallen into negative equity, will depend on your personal circumstances, and what you hope to do in the coming years.
In this situation, your best bet may be to continue making repayments, which over time will build up the equity you hold.
You might also consider making mortgage overpayments, if your deal allows it, which would bring down your loan more quickly. Mortgage rates tend to be higher than savings interest, so you might be better off putting some cash into your mortgage loan.
Over the long term, prices may begin to rise again and help reduce the level of negative equity or even reverse it.
It may also be possible to add value to your property by renovating or adding features that are in demand in your local market. But this can be highly risky - you could spend more on renovations than the value that you gain. In most cases, your cash is likely better used paying down the loan.
Normally, when your mortgage deal comes to an end, it's wise to consider remortgaging - but while it's worth trying this, lenders may not offer you a new deal if you're currently in negative equity.
This means you'll move onto the lender's standard variable rate (SVR), which will generally be higher, meaning your repayments will go up.
As your deal is coming to an end, make sure you can continue to meet the new payments on the SVR over the long-term.
Our mortgage repayments calculator shows you how interest rate changes will affect your monthly repayments.
If it's at all possible, you should avoid selling your house while in negative equity - if you're forced to sell for less than the loan amount, you'll be responsible for making up the shortfall.
That said, your mortgage lender may allow you to repay the debt over time using a payment plan, so it's worth talking to them before you sell.
Keep in mind that selling while in negative equity will mean you won't make a profit and will lose the deposit you paid - so you may not be able to buy a new property straight away.
A very small number of specialist lenders offer 'negative equity mortgages', which enable you to transfer the negative equity to a new property, saving you from repaying the debt. But you might face early repayment charges on your old mortgage, and the interest rates are generally very high.
Another option if you need to move is to let out your property and rent elsewhere. But you'll be responsible for meeting repayments when the property is vacant, as well as paying rent at your new place, which could put you in a worse financial situation.
If you're struggling to meet your mortgage payments, contact your lender immediately. They may offer options that would make your repayments more affordable.
In the meantime, continue paying what you can. Don't be tempted to simply stop paying - mortgage arrears will put a black mark on your credit record and may prevent you from buying a house in the future.
In the worst-case scenario, the lender may repossess your home. Your home will then usually be sold as quickly as possible, often for less than the market value, meaning you'd owe the bank even more than you would have if you'd sold the property yourself.
Any time you buy with a small deposit, even a relatively modest fall in house prices could quickly erode the equity you hold.
If you take out a 95% mortgage, for example, you’ll pay a deposit of 5% - meaning your equity, to begin with, will be 5%. Should the value of the property fall, you’d be near the threshold of going below 0% and falling into negative equity. But if house prices don’t fall, you will be able to steer clear of danger.
As first-time buyers struggle to get on the property ladder, many are turning to guarantor or family mortgages.
These types of deals allow a family member to offer their house or cash savings as security, and the buyer to take out a 100% loan.
With no deposit, you're at higher risk of slipping into negative equity, especially in the early years of your mortgage before you've made significant repayments.
If you are forced to sell while in negative equity, or your home is repossessed, your family member will be liable for meeting the shortfall - which may cost them their own home.
For this reason, you should be careful to ensure you can meet your repayments, and that you're unlikely to be in a situation where you have to sell for less than the asking price.
Capital growth is part of the allure of buy-to-let - rent provides the investor a long-term income, while the asset itself grows in value.
For this reason, many investors buy using interest-only loans, meaning they don't repay the capital on the property, just the interest. In theory, the rent generated pays off the interest each month, while capital growth increases the investor's share of the equity.
If the property value fails to grow, your share of the equity won't increase, limiting your chances of remortgaging or paying off the loan.
You also won't have equity from the property to finance the next purchase and grow your portfolio, a common strategy.
That said, rents don't necessarily track with capital growth, so you may be able to continue letting out the property and repaying the interest until the market picks up again.
If you're concerned about negative equity, there are a few steps you can take:
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