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Secured Loans and Negative Equity: A Complete Guide

Negative equity on a secured loan occurs when the combined outstanding balance of your first mortgage and secured loan exceeds your property value. It is distinct from first mortgage negative equity and has specific implications for selling and remortgaging. Some specialist lenders, including Together Money, will lend into limited negative equity in certain circumstances.

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How Negative Equity Arises on a Secured Loan

Negative equity on a secured loan arises when the combined loan-to-value (CLTV) — the total of your first mortgage balance and your secured loan balance, expressed as a percentage of your current property value — exceeds 100%. For example, if your property is worth £200,000, your mortgage balance is £140,000, and your secured loan balance is £70,000, your CLTV is 105% and you are in negative equity on the second charge.

This can arise through a combination of factors: a fall in property values in your area; a high CLTV at the time the loan was taken out with limited buffer against price falls; and interest accruing on the loan faster than the balance reduces (particularly on interest only products). In areas that have experienced significant local economic shocks, or where property values have been volatile, this is more likely than in more stable markets.

It is important to note that negative equity on the second charge does not mean your first mortgage is in negative equity. The first charge lender still has full security for their loan — there is enough value in the property to cover it. The negative equity falls entirely on the second charge position, since the first charge takes priority in any sale or enforcement. The secured loan lender bears the risk of partial or full non-recovery in a distressed scenario.

Impact on Selling Your Property

Negative equity on your second charge makes selling more complicated. If the net sale proceeds after redemption of the first mortgage are insufficient to cover the full secured loan balance, you face a shortfall. Your conveyancer cannot complete the sale and clear the title to the buyer without resolving this shortfall — either by you funding the gap from personal savings or by negotiating a reduced settlement with the secured loan lender.

Secured loan lenders in a negative equity situation face a choice: refuse to release the charge and thereby block the sale (which may ultimately cost them more if the property deteriorates or the borrower defaults); or agree to release the charge for a reduced sum, accepting a partial loss now in exchange for closing the debt. Many lenders will negotiate when approached constructively, particularly if the alternative is a contested enforcement process with uncertain recovery prospects.

Before agreeing a sale price with a buyer, model the numbers carefully using current redemption figures from both lenders. If the numbers show a shortfall, contact the secured loan lender before exchange of contracts to explore a reduced settlement. Acting early — before you are committed to a completion date — gives you more negotiating room than waiting until the last minute.

Impact on Remortgaging

If your first charge mortgage comes to the end of its fixed term and you want to remortgage onto a new deal, a high CLTV — even if not technically above 100% — can significantly limit your options. Mainstream first charge lenders typically cap at 90% or 95% LTV, and many require a much lower LTV for borrowers with a second charge in place. If your first mortgage LTV is 75% and your combined LTV with the secured loan is 95%, you may find your remortgage options restricted to lenders comfortable with that combined exposure.

In genuine negative equity — CLTV above 100% — standard remortgaging on the first charge is very difficult. You are likely to be limited to your existing lender’s SVR or a product transfer with them, as new lenders will not lend on a security they cannot fully recover in a sale. This can result in paying a higher rate than would otherwise be available, which in turn slows the rate at which your equity recovers.

Some borrowers in this position choose to wait for the property market to recover while making overpayments where their product allows. Others consider selling below what they owe and funding the shortfall from savings to escape the situation entirely. The right decision depends on how significant the negative equity is, how stable or improving the local property market is, and whether the current loan costs are sustainable in the medium term.

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Options and Lenders Who Lend Into Negative Equity

For borrowers who find themselves in a CLTV above 100% but still need to borrow — perhaps to fund urgent home repairs that will maintain or improve the property value — options are very limited but not completely absent. Together Money is one of the few lenders known to consider lending in situations of limited negative equity, taking a view on the overall case including the reason for borrowing, the borrower’s income profile, and the prospects for equity recovery. Their underwriting is case-by-case and they will not lend into deep negative equity, but modest overshoot can sometimes be accommodated.

For borrowers who simply need to manage the existing debt without new borrowing, the options include: making overpayments where allowed by the product to reduce the outstanding balance more quickly; switching to a repayment basis if currently on interest only; extending the loan term to reduce monthly payments while the market recovers; or selling the property and managing the shortfall, as described above.

Free debt advice from StepChange or Citizens Advice is worthwhile even if you are not technically in arrears — understanding your full options from an expert perspective, before problems develop, is always valuable. A mortgage broker experienced in negative equity situations can model scenarios across different options and help you identify the most practical route forward given your specific combination of first charge and second charge positions.

Overpayment Strategies to Rebuild Equity

If you have surplus monthly cash flow, overpayments are the most direct way to reduce CLTV and rebuild equity. Most secured loans allow annual overpayments of up to 10% of the outstanding balance without triggering an early repayment charge, though the specific allowance varies by product — check your loan agreement. Directing overpayments to whichever loan has the higher interest rate first produces the largest interest saving over time; in most cases this is the secured loan rather than the first charge mortgage.

A worked example: suppose you have a £200,000 first mortgage at 4.5% and a £50,000 secured loan at 9.5%, against a property currently valued at £230,000 (CLTV 109%). Overpaying £300 per month entirely against the secured loan reduces its balance by approximately £16,800 over four years (with interest saving), moving the CLTV closer to 100% even before any market recovery. If property values also rise 2% per year, the combined effect restores positive equity within three to four years.

StrategyOverpaymentTime to positive equity (2% annual growth)
No overpayment£0/month5+ years
Modest overpayment£150/month4 years
Aggressive overpayment£300/month3 years

Verify the overpayment allowance on both loans before starting, and keep written records of overpayments submitted. Request a fresh statement annually showing the reduced balance — this evidence is useful when you come to remortgage or sell. Where a lender applies overpayments to future instalments rather than capital by default, formally instruct them in writing that each overpayment should reduce the capital balance immediately, which is the more efficient treatment for interest reduction.

Insolvency Options and Their Consequences

For borrowers whose negative equity is severe and whose cash flow cannot sustain the combined loan payments, formal insolvency options become relevant. The three main options are an Individual Voluntary Arrangement (IVA), Debt Relief Order (DRO), or bankruptcy. Each has specific eligibility criteria and different consequences for a secured loan borrower, and specialist advice (free from StepChange or a licensed Insolvency Practitioner) is essential before choosing.

An IVA is a formal agreement with creditors to pay back a proportion of debts over typically five to six years. Secured loans are usually excluded from the IVA — you continue paying them as normal while unsecured debts are bound by the arrangement. This is often the right choice when the secured loan is affordable but other debts are overwhelming. An IVA remains on your credit file for six years and is recorded on the Individual Insolvency Register.

A DRO is a simpler procedure for small debts (currently under £50,000) and very low asset/income borrowers — homeowners with meaningful equity generally do not qualify. Bankruptcy is the most severe option: the official receiver takes control of your assets including any equity in the property, and the trustee in bankruptcy may force a sale to realise equity for creditors. Secured lenders retain their security through bankruptcy, meaning the property can still be sold from under you. Bankruptcy is almost always the last resort and should only be considered with specialist insolvency advice.

Important: Your home may be repossessed if you do not keep up repayments on your mortgage. There will be a fee for mortgage advice. The actual rate available will depend on your circumstances. Think carefully before securing other debts against your home.

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Frequently Asked Questions

Negative equity on a secured loan occurs when the combined outstanding balance of your first mortgage and secured loan exceeds the current market value of your property. The CLTV is above 100%, meaning if you sold the property you would not receive enough to redeem both loans in full. This is distinct from first mortgage negative equity — your first charge lender may still have full security, but the secured loan lender has insufficient or no security for their debt.

You can sell, but you need to resolve the shortfall. Either fund the gap between the sale proceeds and the total loan balances from personal savings, or negotiate a reduced settlement with the secured loan lender. Many lenders will negotiate rather than block a sale, as a cooperative sale often results in better recovery than a contested enforcement process. Contact your secured loan lender before accepting an offer, as early negotiation gives you more flexibility than waiting until completion day.

Technical negative equity — CLTV above 100% — makes remortgaging very difficult as new lenders will not lend on insufficient security. A high but sub-100% CLTV restricts your remortgage options to lenders willing to accept that combined LTV, which typically means fewer choices and potentially higher rates. Making overpayments to reduce the CLTV, or waiting for the property value to recover, can restore access to a wider range of remortgage products over time.

Together Money has been known to consider lending where CLTV is modestly above 100% in specific circumstances — for example, where the borrower has a strong income, a clear purpose for the funds, and a credible plan for equity recovery. They do not have a blanket policy of lending into negative equity, and each case is assessed individually. A specialist broker will be able to advise whether Together Money or any other lender is likely to consider your specific situation.

Options include: waiting for property values to recover, particularly in markets with a positive long-term outlook; making overpayments on the secured loan or first mortgage to reduce the combined balance; selling the property and funding any shortfall from savings to clear the debt entirely; or, in extreme cases, exploring insolvency options such as an IVA or bankruptcy with a specialist debt adviser. The right route depends on the severity of the negative equity, your cash flow, and your long-term plans for the property.

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