Negative equity, or it is sometimes referred to as being “upside down”, is where an asset’s value depreciates, or goes down in value, and becomes worth less than the balance of the loan that may be against the asset.
Here are two (2) examples:
You buy a property for £150,000, and have a 10% deposit, so you need a mortgage of £135,000. You take out a mortgage for the £135,000 and make your monthly payments.
After a few years the mortgage balance is £129,000, however, the property is now only worth £120,000; this due to the neighbourhood changing and property values dropping.
Owing more than the value of the property, puts you in negative equity.
A second example may be you purchase a car for £10,000, taking out a car loan for £9,000, after having £1,000 as a deposit.
Cars are what are termed as a “depreciating asset” as they rarely go up in value.
So if you still owe £7,000 on the car loan, and the car is now only worth £5,000, you are “upside down” or in negative equity.
So what can you do about this situation?
Time The Great Healer
Your options if in negative equity are few, but one is a constant and true option, time. You keep making payments on the property or car until the loan balance and value begin to equal. This may never happen in the instance of a car, but once the loan is paid off, you own the car, and whatever it is worth.
Having a property is the same, you continue to make the payments.
Your negative equity, or loss, is not realised until you try to sell the asset.
Years ago properties in some countries such as Ireland began dropping in value. The homeowners decided to walk away from their homes, let them be repossessed, rather than continue making payments.
This is also an option, however, not a good one.
If we look at what happened in the last 18 months due to the pandemic, property sales were frozen, as were many car sales. Now that life is getting to the new normal, property values are soaring, and even used car values have gone up.