Definition of Negative equity: Negative Equity occurs when the value of a house is worth less than the mortgage debt.
Negative equity is a real problem for people who need to sell their house and then still end up owing money to the bank.
Many UK Banks remain heavily exposed to negative equity because in the past few years, 100% and 95% mortgages were very common. The annual rate of house price inflation is now negative and if house prices fall by 30%, it is estimated 20% of mortgages could be at risk of negative equity.
Negative Equity and Impact on the Economy
Negative equity can have a powerful influence over the economy. If people see prices falling and their mortgage debt bigger than their wealth it is liable to reduce consumer confidence and see a decline in spending.
Negative equity also makes it impossible to engage in equity withdrawal or remortgage to clear other debts.
What Can Be Done About Negative Equity?
Not much. Often the only option is to downsize. Sell the house and buy one cheaper. However, if you don’t have to move a decline in house prices doesn’t have that much effect on homeowners. – Their monthly mortgage payments are unaffected by falling house prices.