How to Avoid Negative Equity

When people apply for a loan to purchase an apartment, a car or or another item they are often used as a security for the loan which is taken In this way if the borrower is not able to pay the loan a repayment is made thanks to this item. When the investments are concerned the equity represents the difference between the worth of the purchased item and the sum which is owed to the loan.


When we talk about real estates if the amount of the loan is much more than the real price of the purchase there appears a difference which is also known as negative equity. There are many families which face such kind of problems,as they have no possibility to give the whole sum for the property and prefer to apply for a loan.

Negative equity is a common happening and there could be different reasons for it, however usually it is due to the unforeseen decline in the asset's value. Often these consequences could not be thoroughly predicted but there are a few things that may be considered when negative equity is concerned.

In situation in which you deal with negative equity for a property you can do several things to clean the mess :

You can simply wait until the property price rises because in this way your deposit will be restored and you will be able to move. This options is however almost impossible to happen but you can still take it into account.

Another option for the customer is to decide to sell the property and to rent another one in which to live. Clear your mind and stop paying a mortgage every month. Instead of this it is better to pay a rent and decide many of your negative equity problems.

Another option to reduce the negative equity is to pay extra on the mortgage every month. In this way the debt will be reduced and the interest would also decrease. You must first check how much can be paid without penalty.

More drastic but effective measure turns out to be the switching from an interest-only mortgage to repayment. It may be difficult at the beginning

You can also rent-out your own property and rent another one to live in at the same time. It is also a preferred option by many people who have difficulties with their negative equities which increase. There is a risk that your tenant can ruin your property by not cleaning often enough and not taking care of your home interior. You can advise him/her before renting-out. In the end of the tenancy you should require to hire end of tenancy cleaners.

An important moment when taking a loan from a bank is to take into account that some loans do not have negative equity guarantee. However this is a clause which is written in the contract so you should be extremely when you sign it. If there is no negative equity guarantee then there are certain conditions which may be for example maintaining certain standard of the apartment or even if you are allowed to have pets there.

Negative equity is a something that many people struggle, when they decide to purchase a property through a loan. However they should be careful because these loans often hide the risks of negative equity so they are not clean enough to be trusted. Despite this fact you have now a few decisions which could facilitate your life from this burden and choose one of the options.

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Write by: A-Efendy - Sunday, March 16, 2014