Negative
Equity
Negative equity is a term used in the housing
market,
usually
following a
general fall
in property
prices, to
mean that
the market
value of a
mortgaged
house or
condo is
less than
the amount
outstanding
on the
mortgage
loan used to
purchase it.
This can
also occur
with
second-mortgage
home-equity
loans and
some loans
structured
to loan more
than the
appraised
value, such
as 125%
loans. This
means that
if the
borrower
subsequently
defaults on
the loan,
repossession
and sale of
the property
by the
lender will
not raise
enough cash
to repay the
amount
outstanding,
and the
borrower
will both
have lost
the property
and may
still be in
debt,
although a
standard
clause in
most
mortgages
cancels the
debt upon
repossession.
The term was
widely used
in the
United
Kingdom
during the
economic
recession
between 1991
and 1996,
and in Hong
Kong between
1998 and
2003, which
led to
increased
unemployment
and a
decline in
property
prices,
which in
turn led to
an increase
in
repossessions
by banks and
building
societies of
properties
worth less
than the
outstanding
debt.
What causes
negative
equity?
Equity is
the
difference
between the
value of
your home
and the
amount you
borrowed to
buy it. If
you get a
£75,000
mortgage to
buy a home
worth
£100,000,
you have
£25,000 in
equity. If
property
prices fall
and the
value of
your home
drops to
£50,000, you
would
probably
have £25,000
in negative
equity.
In today's
property
market,
negative
equity is
quite
unusual.
However,
there's
always a
risk that
property
prices could
fall. You
will be more
at risk if
you have:
fallen
behind on
your
mortgage
payments
borrowed a
large
proportion
of the
property's
value
increased
the size of
your
mortgage
when
property
values were
high
taken out
other loans
using your
home as
collateral
a mortgage
with high
interest
rates.
If you are
worried that
you could
lose your
home, get
advice
immediately.
Use our
directory to
find a
housing aid
centre or
citizens
advice
bureau that
can help
explain your
options. If
you have
debt
problems,
the National
Debtline may
be able to
help.
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