What is negative equity?

Negative equity occurs when a borrower has more debts than the value of their assets. This means that if the borrower were to sell their assets, they would not be able to cover the outstanding liabilities fully. For instance, if someone has a mortgage on a property that is now worth less than the amount owed on that mortgage, they would be in a situation of negative equity. This scenario can occur in various contexts, such as during economic downturns or real estate market declines, where asset values drop below the debts secured by those assets.

This situation carries significant implications for the borrower's financial health and ability to secure additional loans, and it can pose risks for lenders if the borrower defaults. Thus, understanding negative equity is crucial for both individual and institutional investors when assessing financial risk and making investment decisions.