Negative Equity

Negative equity comes into play when the value of an asset (e.g. your home) falls below the amount of the loan taken out to purchase it. 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 and taken 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.

See Also: Mortgage Centre and Mortgage comparison Service for the latest facts and figures.

Last Updated: June 2007 © Moneyextra.com

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