How is negative equity calculated? Mortgage or principal remaining?

[corklad]

Simple question folks... hopefully someone can give a quick answer.

Say you've a mortgage of 200k that was taken out 5 years ago and the house is now worth 150k. Some of the principal will have been paid off in the 5 years, lets say 20k. Is the house 50k in negative equity or 30k?

In this scenario, if you wanted to sell the house I'm guessing the bank would only leave you do so if the mortgage could be cleared. Would they want 170k to clear this?

 

[ontour]

The bank will want whatever principal is outstanding and any interest accrued. Negative equity is the difference between the current value of the property and the amount of the loan outstanding where the amount of the loan outstanding is greater than the property value.

So if the house is worth 150 and the amount required to clear the loan is 170, the negative equity is 20.

 

[tenchi-fan]

Neither.

Negative equity is a concept that really doesn't concern the bank.

Selling price: (which you estimate to be €150k)
LESS Loan remaining (e.g. €190k, because although you repaid €20k you were also charged interest too, say 10k)
Negative equity = €40k

edit: ignoring interest from the calcs, 30k is the right answer

That's my understanding anyway.

 

[corklad]

Thanks folks, that's pretty much what I was thinking alright.

@tenchi-fan yea my example was only 20k paid off the principal, the interest would be extra on this alright.

As a quick follow-up, is there a usual rule-of-thumb for what the bank would charge for selling the house before the mortgage term is up? Say in this case that the house was sold for 170k, would the bank just take the 170k and close the mortgage account?

 

[tenchi-fan]

There could be admin fees of a few hundred to redeem the mortgage and get your documents returned. Nothing to worry about.

If you are in a fixed-term mortgage (e.g. fixed for 10 years at 5%) you will also have to pay perhaps a few thousand, depending on how long you fixed for and the rate you fixed at.

 

[corklad]

Thanks for the answers!

 

[so-crates]

...
@tenchi-fan yea my example was only 20k paid off the principal, the interest would be extra on this alright....

I can't think of any mortgages that I have heard of where you pay off principal only!! That would be a boon what a way to cut your interest repayments.

 

[csirl]

Negative Equity is where the valuation of a property is in excess of the mortgage principal remaining.

In Corklads example the house is 30k in negative equity as the valuation is 30k less than the outstanding principal remaining [loan was for 200k and 20k has been paid off the principal, so outstanding principal is 180k].

 

[nathan123]

surely you would not have to add any interest to the amount owed to the bank, since the repayments you would have made over the past few years would have been covering your interest.

 

[Robin Banks]

Its the difference between the payout figure on your mortgage and the market value of the property.

If you buy for 200k cash and then sell for 100k, you don't have 100k of negative equity. You've just lost 100k of your own money.

Negative equity is when you wind up owing someone else money on an asset that you've sold.

It is the deadest form of dead money imaginable.

 

[csirl]

surely you would not have to add any interest to the amount owed to the bank, since the repayments you would have made over the past few years would have been covering your interest.

Negative equity only concerns the principal remaining on a loan - interest does not come into it.

 

[corklad]

So negative equity only really comes into play for people with new-ish mortgages. Cos as they go more into the term, the principal gets less and comes closer to the market value of the house.

Nice to know there's some light at the end of the tunnel anyway folks!

 

[corklad]

By the way, I think this original confusion got into my head from people on the radio saying that the young people that bought in the last few years could be stuck in their house forever because they'll never be able to sell their houses for what they bought them for.

 

[Padraigb]

It's generally true that negative equity arises only on relatively recent mortgages.

I disagree with Robin Banks's suggestion that "it is the deadest form of dead money imaginable". If you are living in a home where the outstanding balance on the mortgage is greater than the likely sale value of that home, you are in negative equity. But if you are happy there, with no wish to sell, and you can make your repayments, then negative equity is no more than an interesting (and slightly annoying) fact.

 

[corklad]

But if you are happy there, with no wish to sell, and you can make your repayments, then negative equity is no more than an interesting (and slightly annoying) fact.

Agreed. The other annoying thing is that if the person next door buys at market value then they've a lot more money in their pockets with a lighter mortgage.