Talk to me about negative equity.

[wowbutter]

Help me out here, I may be being thick. No, I definitely am.
I can't really understand what negative equity is or why it happens. If I explain what I think it is from what I have read, can someone say if I have understood?
I feel stupid as I am way way too old to not know this.

Is negative equity, where you purchase a house for 220k with a 200k mortgage. Start paying he mortgage back, then decide to move, but house is only worth 150k meaning by the time you have sold and paid the bank back, you have nothing left and may even owe them money?
So, this is a problem. But, if you don't want to move, what is the issue?
Surely,p you just pay the mortgage and continue to live there.

Yh basically your house is worth less than what you owe.
Its an issue if you need to remortgage or your mortgage product ends as it could mean either you can't remortage or have to pay much higher interest.

If you don't want to move - correct, no problem, until the mortgage needs to be paid off. ...

Yes it is Wow, my boyfriend after uni had negative equity in the late 80s on a flat in London, seems hard to believe now but he had paid about £65k with a 100% mortgage and stayed there for years even though it was north of the river and he had to drive south of the river to work.

I think he was about £9k down on his mortgage value, he added the negative equity to his next mortgage in the end.

Fine if you don't need to move and don't mind living there I guess but jobs can move, families can grow etc., etc..

Yep you have it. No problem unless you need to move.

Oh, thanks everyone! I've read a lot about it, and just couldn't see the problem.
I work with a lady who bought in he huge price hike of 2005 (was it around then?) and she constantly goes on about being in negative equity. So, I asked her about moving, and she says she isn't. So, what is the problem?? How do you even know what your house is worth?

The only reason this is coming to a head now is I have just completed on a new house, a big house, and I'm really worried about things going wrong.

I think 2004/5 was it Wow. So she is basically saying her house isn't worth what she paid for it at the minute.

We are just buying a new house and prices where I live have never been higher - rural north England but a relatively expensive part of rural north England where the average value of a house in the district is 18 times the average salary.

If you are buying for the long term and it is the right house for you/you don't forsee a change in circumstances then you will be fine.

Yep you have it. No problem unless you need to move.

It also means that once your mortgage deal finishes you will go onto the bank’s standard rate which will be much higher - and you won’t be able to get a new deal without equity, so you end up paying more.

It's easy to say it's no problem unless you need to move but it's one of those things that can have quite a negative impact on you even if it's not causing practical everyday problems.

It also often means your stuck on the banks SVR which means your mortgage payments can be higher than necessary.

So, I asked her about moving, and she says she isn't. So, what is the problem?? How do you even know what your house is worth?

It's also an issue when you come to the end of a fix. At that point you have to remortgage and if your house is worth less than the outstanding debt, you can't get a new mortgage deal. So you stay with your existing mortgage but on SVR which has a much higher interest rate than 'normal' deals. So it takes longer to pay the mortgage off and build up equity!

But also a problem if your mortgage becomes unaffordable meaning you can't afford to stay-if interest rates were to go dramatically a lot of people would be in this position as they have over leveraged themselves if I understand it correctly.

Standard rates can be extortionate. When our fixed rate period finished, the interest went up by 3.5% so the repayment got a lo higher. If you're in negative equity, you can't remortgage to a new deal in that situation. Paying the new higher interest might not be affordable so you're at risk of losing the house. Moving won't work either - if you're in negative equity, you don't have a penny for a new deposit so you end up completely screwed.

I think that is right What.

I am also very conscious that we are buying at the top end of the market. I have done that before in a place where prices are always going to stay high.

I don’t think that is the case where I live at the minute, I don’t think the local property market is sustainable.

I think a lot of the prices where I live in particular are driven by a few high performing secondary schools that have been in the spotlight in the last 10 years. Prices seem to have doubled in that time.

But if you need to move you need to move and unlike my last one my next one will hopefully be a long term job.

I agree with the above, it isn't necessarily something that will actually cause a problem day to day. But it isn't a nice feeling knowing that people are buying a house on your street for maybe half of what you still owe on yours or when you try to change to a lower interest rate and cannot. It just isn't a nice feeling. Like you know how when you buy something, say an ipod, and a few months later you see it half price? It is like that, but on a much bigger scale!

I have friends who have been in negative equity for years. They are on a crap interest rate but cannot do anything about it and they are stuck, unable to move. It is horrible!!!! I feel blessed that we didn't end up in that situation. Here in NI, it affected a huge amount of people as we we had a bigger crash than the rest of the UK. I don't think it is something to brush aside as no big deal, it really isn't a pleasant situation to be in.

And if your relationship breaks down negative equity makes it even harder to split finances and may force couples to live together for longer while they are splitting up.

That is a horrible consequence Mehfruittea.