Negative equity is a term which, in the past 25 years, we have become familiar with, and one which we recognise as being undesirable in relation to property debt.
Prior to the UK’s economic downturn of 1991-96 during John Major’s term as Prime Minister, it was unheard of in the everyday lives of the average citizen.
So what exactly is it, and why is its very mention, sufficient to conjure up images of despair, entrapment and hopelessness?
And is such a reaction justified? Or might it be that it is an unwarranted and unduly pessimistic view of a situation which, whilst unfortunate, certainly need not be insurmountable?
Definition of Negative Equity
Put very simply, ‘negative equity’ means that the value of something against which a loan was secured is now less than the outstanding balance. In the United Kingdom and Ireland, it is a term applied almost exclusively to property debt.
In the past, bricks and mortar were popularly seen as sure-fire money-makers, the widely-held belief being that property appreciates in value.
Similarly, it was accepted that other things depreciated in value, often very markedly and rapidly. The market value of a car might drop by 20-30% as soon as it is driven out of the showroom. No-one blinked an eye at that.
But property? Ah, that was different! Or so we thought.
Alas, the recession which struck in 2008 saw the value of many properties plummet. This left those who had taken out loans based on the pre-recession worth of their homes, with debts greater than the now-revised figure.
If, in 2006/07 when the British and Irish property booms were at their peaks, a buyer took a mortgage of £210,000 for a house, today valued at £140,000, they have a problem as they cannot now sell other than at a sizeable loss.
In the case of negative equity property debt, the double whammy stems from the fact that, in addition to this significant loss, the amount raised from a sale at this stage would be insufficient to clear the outstanding debt to the bank of building society.
In the current climate those who have suffered are the borrowers who, in the days of ‘easy money’, took out loans of 90%-100% of the property’s value. From the outset, they were most at risk in the event of any fall in the value of property.
If this sounds familiar to you, get in touch and speak to a property debt expert!