Negative equity is not a positive position to be in
Negative equity when used in relation to mortgages occurs when the value of the property falls below the amount of money still to be repaid on the mortgage. The situation is sometimes called an underwater mortgage. The eZonomics article “What is negative equity?” explains the term and its implications.
“As safe as houses” takes on a different meaning
Negative equity can occur when house prices fall, usually after a prolonged period of rising property prices. The period of rising house prices may encourage people to borrow more than is appropriate to purchase a property. Borrowing a large percentage of the purchase price of a property carries financial risk. If house prices fall, the risks are exposed and the loan can no longer be considered safe. House prices fell in many countries following the global financial crisis. While they have recovered in some countries, they are still below levels recorded before the crisis in other places.
Ways to avoid the negative equity trap
A key way to avoid negative equity is to save a sufficient deposit before buying a property. This will provide a cushion against the possibility of falling prices. Before buying, it makes financial sense to consider the background to conditions in the property market. The eZonomics video “Are house prices expensive or cheap?” suggests comparing the price of houses against the amount people earn and comparing the relative costs of renting and buying before committing to buying a property.