Equity is calculated as assets minus debt. If you have a home worth a certain amount and loans for a larger amount, so the debt exceeds the assets, your equity is negative. In other words, you owe more than you own.
It can be a warning sign pointing towards insolvency, but it is not the same as bankruptcy. The two are often confused, which is unfortunate, because the difference is exactly what gives you room to manoeuvre.
The bank may demand extra security if your equity is negative, but the situation can change. Your equity turns positive again when the home’s value exceeds the debt, either because you have paid off part of the loan or because the home has risen in value. The rest of this article covers what negative equity means when you want to sell, remortgage or move your loan, and which options you have.
How negative equity arises – and how to avoid it
The maths itself is simple: assets minus debt. If you have assets of 100.000 kr. and debt of 130.000 kr., that gives 100.000 minus 130.000, i.e. negative equity of 30.000 kr. In other words, you owe 30.000 kr. more than your assets are worth.
You can typically borrow up to 80 % of the home’s value with a mortgage loan (realkreditlån) and a further 15 % with a bank loan, so the last 5 % has to be covered by your own equity. That structure determines how much you can borrow before you reach the limit.
Over-borrowing happens when you borrow more than the property’s value can support. If, for example, you have loans of 1,7 million kr. on a home valued at 1,5 million kr., the debt is 200.000 kr. more than the home’s value, and the equity in the home is negative.
If you want to avoid it, the key is to stay within the 80/15/5 limits and not borrow more than the home’s value can support. That does not mean you can never borrow up to the limit. You just need to be aware of what happens if the home’s value falls. A loan that was right on the edge when you bought can end up on the wrong side of zero if the market moves against you.
Negative equity makes your finances more vulnerable. You have less to fall back on if you struggle to pay on time, and ultimately it can lead to insolvency.
What does negative equity mean for selling your home?
When you sell a home with negative equity, the problem does not disappear when you sign the deed. The sale price goes first towards paying off the debt. If the home sells for less than the debt, you have to cover the difference. That amount is called residual debt (restgæld), and it stays with you even though you no longer own the home.
Over-borrowing is why it is hard to sell without a loss. The sale proceeds do not cover the total loan, so you are left with a shortfall that you have to settle yourself. A sale that at first looks like a way out can therefore end up costing you money, because you both lose the home and are left with part of the debt.
The bank also keeps an eye on the figures. If it judges that your finances are vulnerable because of negative equity, it can demand extra security. So the sale is not just an agreement between you and the buyer. The bank also has to approve it and can set conditions.
If the difference between the sale price and the debt is too large to pay straight away, you may have to enter into a residual debt agreement with the bank. With such an agreement, the difference is paid off over time rather than all at once. You get a payment plan instead of a claim that must be settled immediately. It is often the route that remains once the sale has gone through but the debt is still there.
Remortgaging and refinancing with negative equity
You can remortgage a home loan even if your equity is negative, but the numbers have to add up. Refinancing with negative equity is about weighing a lower monthly payment against the costs that come with it.
The classic rules of thumb for remortgaging say that:
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The interest rate must have changed by at least 1 – 1,5 percentage points
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The outstanding debt must be at least 500.000 kr.
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There must be at least 10 years left of the loan term
If your loan meets all three criteria, there may be something to gain. If it does not, you should check extra carefully whether remortgaging will actually pay off.
The costs of remortgaging are made up of several parts:
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Price loss
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Fees to the bank and the mortgage lender
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Registration fee of 1.825 kr. plus 1,25 % of the part of the new loan that exceeds the principal of the mortgage deed being cancelled
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Price spread and brokerage
These are the amounts you need to weigh against the monthly saving you expect. Otherwise, remortgaging may end up costing more than it saves.
Down-conversion (nedkonvertering) is a concrete example of what can be at stake. A lower interest rate can reduce the monthly payment by about 1.100 kr., while the costs are estimated at about 25.000 kr. Here you can work out for yourself how many months it will take before the saving has covered the cost.
At the same time, the debt factor rules limit which loans you can choose. If the loan-to-value ratio is above 60 % and your debt factor is above 4, you can as a rule only get fixed-rate loans, with or without repayments, or variable-rate loans with repayments and an interest rate fixed for at least 5 years, such as F5. Whatever type of loan you end up with, the bank must as a rule assess that you could be approved for a 30-year fixed-rate loan with repayments.
Moving your home loan and choosing a bank
Moving a home loan with negative equity involves two steps that happen at the same time. Your current loan is paid off, and you take out a new one elsewhere. There may be an arrangement fee, registration costs and the cost of a new valuation of the home, and these amounts can quickly add up to a large total if you do not keep track of them in advance.
That is why you should always ask for a complete offer before you agree to anything. An offer with every item listed is the only thing you can really compare. If you are only shown the interest rate, you have no idea what the move will end up costing you in actual money.
The loan-to-value ratio plays a big part in the interest rate you can negotiate. The lower the loan-to-value ratio, the better the rate you can typically get, because the bank takes less risk when the loan makes up a smaller share of the home’s value. So if you have negative equity, you start the negotiation from a harder position, and that is worth factoring in before you start ringing round.
With negative equity, a bank may refuse to take over your loan. This typically happens because of a high debt factor or an RKI registration (Denmark’s register of bad payers), which makes you a customer the bank does not want to take on. Rather than pushing, you should reduce the debt or wait for a registration to be deleted, so your profile looks different the next time you approach the bank.
When you compare banks, it is worth asking around. Ask each bank for its specific terms for home loans with negative equity, so you have a real basis for comparison and not just an interest rate to set against the others.
Repay, wait or a residual debt agreement – and get help from Brikk
When your equity is negative, you have three routes to choose from, and they are not mutually exclusive. You can keep repaying, you can wait and let time do the work, or you can negotiate an agreement with the bank.
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Keep repaying. Every single payment pushes the debt down. Even if house prices have fallen, repayments and patience can bring you back to positive equity over time.
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Wait and let time and repayments work for you. If you are not in a position to take active steps right now, you can let your regular payments and the market do the work until your equity is restored.
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Enter into a residual debt agreement with the bank. If a sale does not cover the whole debt, you can try to pay off the remaining amount as an unsecured loan or through an instalment plan. A debt agreement with the bank on the home loan gives you a payment plan instead of a claim that has to be settled all at once.
Whichever route you choose, there is one protection you should know about. If the bank wants to change the interest rate on a home loan to your disadvantage, it must as a rule give at least one month’s notice, and changes to fees, contributions and other charges must be notified at least three months in advance. However, this does not apply to changes caused by factors outside the bank’s control, for example when a variable rate follows the market rate. The rule does not apply to mortgage loans or mortgage-like loans. The notice must give a reason, and it gives you time to do the sums, negotiate or find an alternative.
If you are thinking of selling, you can get a free, no-obligation valuation from Brikk, so you know what the home can realistically sell for and how large any residual debt might be. If you need a new loan, Brikk can put you in touch with a lender. That way you have the figures in place before you decide whether to keep repaying, wait or negotiate an agreement with the bank.
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