Negative Equity. We're not all going to die.....

It is a term that is bandied about by the national press in much the same scaremongering manner as "internet paedophiles" or "carcenogenic". Negative equity has returned to the UK - a report from the CML today estimated that at least 900,000 homeowners had some degree of negative equity - but is it really as horrifying as the press make it out to be?

Negative equity is, very simply, a situation in which a borrower owes more on their mortgage than the value of their home. With the various changes in the mortgage market since the last recession of the early 1990s it was always likely to be the case that when prices started to fall, a number of borrowers would experience some form of negative equity. Rises in the numbers of high "loan to value" mortgages (to 100% and beyond) coupled with an increase in "interest only" loans have no left almost a million (according to the CML) borrowers in negative equity.

The simple fact of being in negative equity, though, really doesn't affect you as a homeowner. If you have no intention to move house then it doesn't much affect you - your repayments stay the same - other than the psychological effect of owing more than your asset (home) is worth.

If you think about it, though, there are millions of people in negative equity on something, if we define it as "the asset being worth less than the finance secured on it". Many with car finance or "hire purchase" agreements for a flatscreen television or washing machine would probably find that the outstanding finance was more than the value of the asset they had purchased. If you're not intending to sell the asset then, in time, that situation will reverse and you will owe less than the value by virtue of paying the debt faster than the asset depreciates or paying it off altogether.

Of course your home is a bigger asset than a new tumble dryer, but it also is likely to appreciate in value (unlike these other items). However, the mere fact of being in negative equity shouldn't alarm a homeowner in quite the way the press would have you believe - in time the asset value will recover and that situation will reverse. In the meantime, borrowers can use cuts in interest rates to overpay on their mortgage and therefore bring the loan back within the asset value or, alternatively, sit tight and wait for the housing market to recover. Which, of course, it will.