Negative Equity
mortgage glossary
When the value of an asset (e.g. your home) falls below the amount of the loan taken out to purchase it, you are said to be in a position of negative equity. 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, you may have bought your home in 1988 for £ 150,000, taking out a £ 130, 000 mortgage and providing a deposit from your own resources of £ 20,000.
But if the value of your home falls to £ 125,000 (as it may well have done by 1995), you now find yourself with a mortgage still outstanding of £ 130,000. But, sadly for you, if you sold up, you'd receive just £ 125,000. In other words, when you bought your home you had equity of £ 20,000 in it, following the house price falls, you now have negative equity of just £ 5000.*
More than a million people found themselves in this position in the UK in the early 1990s after being effected by a severe housing market recession which was caused in part by high interest rates between 1989 and 1992.
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