Best Buy Mortgages Glossary - Negative Equity
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Negative Equity
When the value of an asset (e.g. your home) falls below the
amount of the loan taken out to purchase it, you are said to be
in a position of negative equity. In other words, were you to
sell your asset (e.g. your home) you would not receive enough
money to enable you to pay off your loan (your mortgage).
For example, had you purchased a property in 1988 at the peak of
the 80s housing boom for £150,000, taking out a £130,000
mortgage, you might have been somewhat upset to find the value
of your home falling to £125,000 (as it may well have done by
1995). If you had taken out an interest only mortgage you would
still owe £130,000 but the asset your loan was based on would
have been worth £5,000 less – a shortfall you would have had to
make up if you wanted to sell the property.
More than a million people found themselves in negative equity
in the UK in the early 1990s after being ravaged by a severe
housing market recession, which was caused in part by high
interest rates between 1989 and 1992.
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