Negative Equity
The word ‘equity’ means the full value of your property minus the the amount left on your mortgage. If you have negative equity (a bad situation to be in!) this means that the amount of mortgage you have left to pay is actually more than the value of your house.
If we look at a ‘worst case’ scenario, this is disastrous since if you have negative equity and default on your payments until the point your house is repossessed and resold by the mortage lender, the value of the home will still not be enough to pay off your mortgage! You will be left without a property, and still be in debt to the lender, who at this point will probably cast you over to a debt collection agency. If you do have the misfortune to have negative equity, clearly you must be absolutely scrupulous about meeting your repayment obligations.
So how is negative equity arrived at? There are two classic models, the first and most prevalent being when you buy a house when the market prices are very high, and they subsequently collapse. This, obviously, means your house is worth less but your mortgage remains at the same level as previously.
The second model for negative equity is when someone takes out more and more loans against the value of their house, again until their debts outweigh the house value.
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