What is Negative Equity ?

Negative equity is a term that has dominated news stories and is the talk of local bars of late, but do people know what it means and how it affects them? Basically, when the value of an asset used to secure a loan is less than the outstanding balance on the loan this is referred to as "Negative Equity".

In the current Northern Ireland economic climate this refers to each of the 68,000 mortgages recorded where the loan balances of the mortgages are more than the property is worth. Properties in negative equity are often referred to as being "underwater" and in an owner-occupied housing market, a fall in the market value of a mortgaged property is the usual cause of negative equity.

Negative equity may occur when the original mortgage was too generous. in fact, borrowers most exposed to negative equity are those who obtained loans of a high percentage of the property value. This is called the "Loan to Value" which was maybe 90%, 95% or even 100% which were common during the property boom years.

Negative equity may also occur if the property owner obtains a second-mortgage (commonly known as a second charge). This causes the combined loans to exceed the property value.

Negative equity is a concern for all borrowers, and particular in the worst case scenario, where a borrower is in "default". Default is where a borrower has missed three or more loan payments. Being in default can result in repossession and sale of the property by the lender. Because of the negative equity, this will not raise enough cash to repay the amount outstanding. In these circumstances, the borrower will still be liable for this debt as well as having lost their property. This debt is referred to as a "debt shortfall".

This may sound overwhelming, but where you have problems, our Equity Experts find solutions. Regardless of where you find yourself at (paying your mortgage provider or not), our team of Equity Experts are on hand to educate and empower you. Our team will assist and guide you to make rational decisions in what can only be described as unfortunate and irrational circumstances.

If you need more information or want to ask me a question, just "Ask Darwin".