Negative equity, as the term implies, relates to the negative difference between the value of an asset and the amount of loan taken up to pay for the asset and thus the corresponding debt problems. Typically associated with the housing market, negative equity can be well understood by considering the fall in property prices and thus the market estimation of the house, below the amount outstanding as mortgage loan.
A serious implication of the same, for the lender, would be reflected in the inability to recover the funds, in an eventuality of payment default, by sale of the property or arranging for repossession.
What is it?
Negative equity is a concept, which is presently enjoying ample web traffic, especially from British residents. After the 1991 – 1996 economic recession, the negative equity epidemic again seems to of hit UK cities. The property price – wage mismatch and the associated speculations have created a downward spiral, which is further offering buoyancy to the overall negative equity situation in UK.
Fuelled by the use of credit cards and same day loans, this climate of borrowing fast cash with no thoughts to the repayment schedules or responsibilities is a primary cause of falling into financial problems and ultimately exacerbating negative equity problems.
The immediate repercussions
With the negative equity crisis subverting, the obvious panic driven reactions include selling off the property or seeking another higher interest rate loan. Neither of the stated would essentially help. This comment is not baseless and can be understood with profound reasoning to backup. Both the steps would invariably escalate the already felt house mortgage related debt problems. The first option i.e. selling off the house, would not raise enough funds to repay the due mortgage amounts. The lender or the creditor, in this situation has complete rights in UK to take a substantial legal action, in case the borrower is not able to pay the balance amount and thus settle the negative equity related debt problems, post the sale of property. A risky loan here would further escalate the negative equity issue. Debt problems are bound to increase, if the interest rates move upwards, which is quite an eventuality in such situations.
Hang on, because you must. Negative equity allied debt problems are obviously not expected and therefore not planned for. However, this doesn’t imply that you must simply give up. There are ways, by which, it is at least possible to bring down the impact of the experienced negative equity to a minimal value.
Disposing off the property could wait, for prices to at least come up a minimal bearable mark. Here also, before selling, make sure to obtain lender’s consent on the process. While contemplating ways out of negative equity debt problems, bear one fact in mind. Just because the property is facing negative equity scenario, the lender does not enjoys legal powers to repossess.
The next step is to cut out on any further home equity borrowings. Try maintaining the best gap possible. While considering loans to handle negative equity, aim for a fixed rate loans.
With this you can at least provide for uncertainty associated with tempting yet unpredictable adjustable loan rates and ensure minimal escalation of debt problems.