Is Negative Equity just an Illusion ?

I was just thinking about this earlier today and thought it might be an interesting debate.
Most of those(us)* who are in negative equity have only bought in the last 6 or 7 years to the best of my knowledge. And nearly all of us have used a mortgage to purchase the property.

Taking a fictional example of someone who bought a €200,000 house on 1st January 2004. Mortgage details 3.5% interest over 25 year.
Assuming the interest rates stayed the same since then , on the 1st of January this year the mortgage holder would have paid back €46,775.05 of the principal and €97,120.97 in total.
Assuming the property is only worth €100,000 now, it's still worth more than has been paid to date, so one could argue that the owner is not in negative equity.?
The bank might be in negative equity all right though !


* In my case I think I'm not in negative equity on my mortgage but I have other borrowings besides my mortgage which would put me in negative equity so to speak.

RichInSpirit said:

Assuming the property is only worth €100,000 now, it's still worth more than has been paid to date, so one could argue that the owner is not in negative equity.?

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Huh? I think bottom line is this.

Current market value = X
Debt related directly to the property/asset = Y


Whether your in negative or positive equity depends on what the outcome is from X-Y....regardless of what has gone before.

However, if I understand what your getting at (and I'm not sure if i do), just like a couple of years ago when people were harping on about what their house was worth (i.e. positive equity) - and folks here on aam cautioning that it was an irrelevance as it was their home - and they had to live somewhere... I guess you could apply the same principal to where we are now (with the exception of the most chronic cases of neg equity - and investment properties).

Assuming the property is only worth €100,000 now, it's still worth more than has been paid to date, so one could argue that the owner is not in negative equity.?

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Sorry, this makes no sense whatsoever.

As Sid says, a borrower is in negative equity if the mortgage balance outstanding today exceeds the current selling price of the house.

There are two caveats to this, which is what I thought you might be getting at when I saw the thread title.

FirstlyIf I have a property worth €200k and a mortgage of €300k, my negative equity is €100k. However, if I have €150k on deposit in the bank or in shares, then I am not in negative equity as my assets exceed my liabilities.

SecondlyIf I have a property worth €200k and a mortgage of €300k but I have 25 years left on an interest only tracker at 0.5% above ECB, the real value of my mortgage is probably only around €225k, so my negative equity is a lot less than €100k.

Re. No sense whatsoever

I'm crestfallen. Maybe move the thread to the not so great financial debates.

Let me help you save face, Rich.

Suppose (1) you have a house subject to a mortgage of €150k; (2) you are able to service the mortgage; and (3) you are content to continue living in that house. In those circumstances, any supposed market value of the property is irrelevant, because the property is not on, or about to go on, the market.

In such circumstances, negative equity is notional, and I think you could use the word "illusion".

"The bank might be in negative equity all right though !"


You also might be falling into the mistaken belief that the bank own the property as you have a mortgage.

This is incorrect, you own the property, and you have a loan with the bank. The fact that the money you borrowed was used to purchase a house is only relevant in that the bank has the house as security to the money that you borrowed.

Padraigb said:

Let me help you save face, Rich.

Suppose (1) you have a house subject to a mortgage of €150k; (2) you are able to service the mortgage; and (3) you are content to continue living in that house. In those circumstances, any supposed market value of the property is irrelevant, because the property is not on, or about to go on, the market.

In such circumstances, negative equity is notional, and I think you could use the word "illusion".

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+1. If you can afford your mortage and you are happy in your home then the best thing to do is stick your fingers in your ears, never ever check prices on myhome or daft and enjoy your life!

speirbhean said:

+1. If you can afford your mortage and you are happy in your home then the best thing to do is stick your fingers in your ears, never ever check prices on myhome or daft and enjoy your life!

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+1
Best advice ever, thank you.

speirbhean said:

+1. If you can afford your mortage and you are happy in your home then the best thing to do is stick your fingers in your ears, never ever check prices on myhome or daft and enjoy your life!

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Until the prices start rising again when you (not you personally!) can have dinner parties again and tell your friends how much you are "up" and about releasing equity to buy that place in France on the never-never. Ohh...and don't forget the bank shares too!