Whenever your house price falls there is a risk that you could fall into negative equity, when your mortgage is worth more than the value of your home. It becomes a problem if you need a new mortgage deal, can't afford your mortgage repayments or have to sell your home.

Here Times Money considers the options for borrowers stuck in the negative equity trap.

Paying down your mortgage

Experts say that borrowers in negative equity should try to reduce their loan to value (LTV) ratio by overpaying.

Most lenders will allow you to overpay by up to 10 per cent each month. Others cap the amount that you can overpay. For example, Nationwide limits overpayments to £500 a month.

Beccy Boden-Wilks, of National Debtline, the debt charity, suggests: “If you have a spare room, consider taking a lodger to raise money to pay down your loan. Earnings up to £4,250 a year will be tax-free.”

Borrowers should also ensure that they are making capital repayments rather than simply sticking to an interest-only deal. Paying only the interest while house prices are falling will only make it more likely that homeowners hit a problem later on.

Moving out

Negative equity is a significant hurdle for homeowners who need to sell up, because the sale can lead to a substantial mortgage shortfall. If you need to move, a handful of lenders will allow you to “port” your mortgage to a new property. Lloyds TSB and Halifax allow porting, provided that you do not require additional borrowing.

Another option could be to move and rent your property to cover the mortgage payments. However, speak to your lender before considering this. Similarly, if downsizing is an option, you will need permission from your lender if you want to sell your home.

Homeowners who are struggling to meet their mortgage repayments face the prospect of being chased for the remaining debt if their house is repossessed and sold for less than the mortgage.

Ms Boden Wilks says: “In the recession in the 1990s it was common for borrowers to give back their keys and walk away from their property. Borrowers did not realise that if there was a shortfall after the property was sold, lenders would chase the former residents for the outstanding debt.”

Repossession

The Council of Mortgage Lenders (CML) estimates that half a million mortgage borrowers will be at least three months in arrears by the end of 2009 and 65,000 households will lose their homes.

Borrowers in negative equity who have their property repossessed often have the problem compounded by lenders. The sale of their property is often at auction, which means that it is even less likely to achieve a price sufficient to cover the full debt owed to the mortgage lender.

The last time that the UK housing market was hit by widespread negative equity, large numbers of lenders imposed charges for mortgage indemnity guarantees (MIGs), also known as a higher-lending charge. These were used to insure the lender against loss if it repossessed the home of a borrower in negative equity. The MIG would cover the difference between the property's sale price and the amount of outstanding mortgage debt.

However, Moneyfacts.co.uk, the financial website, says that few banks or building societies still include MIGs in the cost of their mortgages. It found that less than 5 per cent of deals include a provision for loss on a repossessed property, suggesting that lenders are instead expecting to absorb the costs.

Banks and building societies can chase borrowers for mortgage shortfalls for up to six years after their home is sold or the last time that they had contact with the lender, under rules set out by the CML.

The balance owed to the mortgage lender is treated as unsecured debt and homeowners can be pursued through the courts. It is likely that the debts will also remain on your credit record if you fail to pay, which will hamper your ability to obtain a mortgage in the future. In some more extreme cases, former homeowners can even be forced to declare themselves bankrupt.

Talk to your lender - urgently

Homeowners who find themselves in negative equity and who can no longer afford to cover their monthly mortgage payments should seek help at the earliest opportunity, urge debt advisers.

Lenders may be prepared to extend the term of your deal or allow you to switch to interest-only payments to lower your monthly costs.

Borrowers should also consult their local authority housing department or housing association.

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Five websites

Direct.gov.uk

NationalDebtline.co.uk

Citzens Advice

Consumer Credit Counselling Service

The UK Insolvency Helpline