Negative equity occurs when a property’s value is less than the outstanding balance on the mortgage. Being ‘underwater’ is a colloquial term for negative equity. But what is equity? Equity is the difference between your home’s value and the outstanding amount to pay on the mortgage. In general, your equity in your home increases as you make repayments over time.
How Does Negative Equity Occur?
Falling home values generally cause negative equity. Let’s say you bought a house worth $500,000 with a deposit of 10% – $50,000, and you took out a loan of $460,000. After a year, you repay $25,000 of the principal. You owe your lender $435,000, calculated as the total mortgage ($460,000) minus the amount of the principal repaid ($25,000). But home prices have dropped, and your home is now worth just $400,000. If your house sells at $400,000 today, you will owe your lender $35,000 more than you received for it, so you have negative equity of $35,000.![](https://www.homeloanexperts.com.au/wp-content/uploads/2023/03/Negative-Equity.webp)