What Is Negative Equity?

Article Category: Finance

With the world economies struggling to pull their way out of recession, a lot of recent talk has been about house prices, home owners and negative equity. This article explains about what negative equity is.

Negative equity is a term used to refer to a situation where the outstanding balance of a secured loan exceeds the value of the property that the loan was taken out on. Negative equity often occurs when a homeowner purchases a property with a mortgage and then the demand for property drops (often as a result of a slowing economy), resulting in a subsequent fall in house prices.

How is negative equity calculated?

Negative equity can be calculated by taking the value of the asset at the current time and deducting the outstanding balance of the mortgage loan.

As an example, if an interest-only mortgage is taken out on a property at $200,000 and, during the term of the mortgage, the value of the property drops to $150,000, you end up with a $200,000 outstanding loan on a property worth $150,000. This means that you are $50,000 in negative equity.

A person holding negative equity is said to be "upside down".