What is Negative Equity?

Negative equity is an increasingly common phrase which brings that pit of your stomach dread feeling to UK homeowners. Individually, these couple of simple words seem innocent enough but brought together it is used to describe the nightmare scenario of when a home is sold at its current market value is worth less than the mortgage debt taken to buy the home. Unfortunately, there is no convenient solution to fix the issue of negative equity once you are in that situation and it can seriously limit your options in life. Such as if you need to move to a bigger house or move to an area with better employment prospects.

Negative equity in the owner-occupied market has sometimes occurred when the owner obtains equity release mortgage or equity release schemes , so that the total loans exceed the home value when the loans are first made.An equity release mortgage or equity release schemes are a way of home owners to gain access to capital held in their home.

However, too much money is released from the home through a equity release morgage, in a falling or stagnant market means that if the borrower immediately 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.

are used by homeowners in a rising market.

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.

One option open to home owners in negative equity is to try and sell your home before the losses mount. However, you will need to get permission from your lender as part of their rights are that they can stop a sale going through if the market sale price does not cover the outstanding mortgage debt. It will be up to you to convince them that the market sale price is the best possible price for the property in the near term. One thing to highlight is that if the house was to be sold by the mortgage lender, the sale price would be much lower as the property would be unoccupied and gradually fall into disrepair.

It is worth noting that in the UK, the negative equity debt outstanding once the house has been sold is still owed to the bank.