- Definition of a negative equity situation
- How does one arrive at a situation of negative equity?
- What to do in case of negative equity?
Negative equity, this term very used in the Anglo-Saxon countries, does not really have equivalent definition in French. But it has become common since the real estate crises in both the United States and European countries. It refers to the situation in which a borrower finds himself when the selling price of his property does not allow him to repay his credit in full. He sells at a loss...
Definition of a negative equity situation
Negative equity is sometimes translated as negative or negative capital. This is when the value of your property is less than the capital remaining due to the bank.
Mathematically the situation of negative equity can be translated as follows:Value of the property sold: 150,000 €
- Remaining capital: € 180,000
= Equity negative: € 30,000
How does one arrive at a situation of negative equity?
The risk of negative equity is even higher as you sell quickly because the first years you pay much more interest than capital.
The most common reasons are real estate crisess and the bursting of real estate bubbles. You bought at a time when prices were high (too high) and you have to sell before paying off your entire loan (transfer, death, dismissal, etc.) but prices are lower.
Some city districts are seeing real estate prices fall. If, unfortunately, your home is in such a place, you are likely to have trouble selling and find yourself in a situation of negative equity.
Another reason can lead to a situation of negative equity. If you financed by the loan not only the purchase of the property but also the acquisition costs (notary fees, mortgage fees, etc.). We then speak of 110% real estate loan. During a quick resale, the sale price of the property may not cover the entire outstanding capital.
What to do in case of negative equity?
If selling your home leads you to such a situation, the ideal is to give up the sale or to consider, where possible, to rent the property.
If you are obliged to sell, you will have to continue to repay to the bank the portion of capital remaining due while having to finance a new home. It is by getting closer to your bank that you can negotiate the best solution and especially a spread of your debt.