Mortgages and Negative Equity

Not so long ago the rules of buying a property were clearly defined. Mortgage banks set some pretty strong criteria which had to be strictly adhered to and there were no room for negotiation. Equity of a minimum of thirty percent was required on a property, and if you didn't have the thirty percent, you saved harder till you did. In the case of young couples who were buying their first home, it was fairly common practice for the bride's parents to pay a fairly large chunk of the deposit, with the groom's parents adding a little, and the young couple making up the balance. Sound idyllic? It was. For the simple reason, that then, which means up to fifteen years ago, property prices were realistic and an average family could afford to pay out the relatively small sums of money required to make the equity required to purchase a property.

However, as the property boom began to take of in the mid nineteen nineties, and property prices began to rise, it became increasingly difficult for buyers to raise the money required for equity. So what did the banks do? So anxious were they to sell mortgages and earn interest that they began to relax their restrictions on equity minimums. Fuelled by the seemingly never ending property boom, every year they demanded a little less equity, Not only that, the banks, so hungry were they to lend money and earn interest, were less than stringent in doing physical valuations on the properties that they were lending against. It seemed that no matter the state of the property, it would always rise in value. This was true, at least on paper, till the sub-prime mortgage crisis fell upon the World in the summer of 2007.

When the bubble burst, home owners were forced to wake up to the reality that their property values had dropped by ten per cent almost overnight and the predictions were that they could fall to as far as twenty five percent within the next few years. For veteran home owners, who had bought properties twenty or even ten years ago, and invested reasonable equities and seen their property rise to double in value, whilst it was upsetting it was by no means a disaster. Also for people who purchased a property five years ago or after, and had placed little or no equity into the property the situation is not easy, but is liveable with, at least in the short term. The people who appear to be hardest hit or those who bought properties in the early 2000s. Those who placed equity of between five to fifteen percent of the value of the property when they bought it.

Today their property is worth ten percent less, which means that they have lost whatever appreciation on the property value they earned, and are starting to dig into their equity. With property values continuing to fall the equation is that they will have lost all their equity and will actually owe more on their mortgage than the property is worth.

That is a classic case of negative equity and how innocent people who wanted to own their own properties and invested reasonable sums of their own probably hard earned money to do see the danger of having their equity wiped out. The best advice you can give to these people is to hang in, not to panic and in time their property value will return, and their equity will be saved. In may take time, but it will happen.

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