Negative equity mortgages
July 14th, 2010
When a person goes into negative equity then on a day to day basis then there may not seem to be a problem. After all the bills are the same, and as long as the person was not relying on borrowing the equity in their home then the negative equity would not impinge on them in the short term.
In the long term there is also little problem, house prices tend to mirror wages in the long run and wages go up. There may be significant periods during which house prices dip, but these are usually over with after a while and so as long as a person keeps paying their mortgage then the negative equity will go away.
However it is in the medium term where it can be a problem. This is when a home owner wishes to move. Usually when a person wants to move then there will be no problem as the person sells their house, pays off the mortgage and then goes into a new house using their equity in the old house to in effect to make a deposit for a new house. This is called the housing ladder.
This pattern is problematic with negative equity. Negative equity means that a person can not sell their house at a profit; they can only sell at a loss. It also means that they do not have a deposit for their house. In some cases they may be transferring their negative equity from one house to another house.
However when there is a general fall in house prices, particularly when this is a sustained fall in house prices, then some mortgage lenders can start offering negative equity mortgages. These mortgages are essentially loaning an amount of money for a home that is less than the value.
This is done for a number of reasons. In many of these cases the old bank that had leant against the original home is now lending against the new home. They may see the negative equity mortgage as a way to ensure the long term business of a client that is a good customer who buys a large number of products and has established a record as a good payer.
Another reason is that it may be a way of ensuring that a person does not simply walk away on their existing loan, or to win business. Most of these loans are based on the premise that the negative equity will be a temporary phenomena.
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