By James Andrews
June 10 2008
After almost a decade of soaring house prices, the property market has begun to stumble.
Profits that people assumed they would make have disappeared, or been eroded, buyers aren't buying and sellers aren't selling - but there is a darker side to a falling market: negative equity.
Negative equity is when your mortgage is bigger than the value of your home. It means that even were you to sell up, you would still be in hock to the bank.
How bad is it?
Over the years, the thought of homeowners falling into negative equity has acquired mythical "horror" status.
But how likely is it to happen to you?
To find yourself in negative equity, house prices have to fall far enough to wipe out any deposit you made when buying the house, as well as any growth in house prices since you bought the property, as well as any mortgage repayments you have made since taking out the loan.
Of course, those taking out interest-only mortgages are more at risk. Especially those who took out deals recently, worth 90% or higher of a property value.
Just a year ago, before the credit crunch began to bite and Northern Rock went to the wall, lenders were happy to forward not just 90% of a property value as a loan - but even as much as 125% or 130%.
This would, theoretically, put a homeowner into instant negative equity. At the time people didn't seem too bothered, as it was assumed house prices would keep rising forever.
But even then, many homeowners were dubious about "buying" a home when the bank still owned 100% or more of it.
"Those people with loans up to 125% of their house's value are genuinely between a rock and a hard place. The price of their house may have fallen and they won't have built up enough equity to secure a better deal," said Francis Ghiloni, Marketing and business development director at mortgage comparison service mform.co.uk.
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Source:
http://money.uk.msn.com/mortgages/mortgageguide/article.aspx?
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