Definition
Negative Equity
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A status of negative equity on a home loan arises when the mortgage balance is more than the value of the property.
This can be a frightening realization to experience which basically implies that all that money made towards mortgage payments over the years have disappeared without a trace!
This situation seldom occurs in the Singapore real estate market as property prices tend to hold strong and rise over time.
On top of that because of the widespread negative equity faced by American households caused by 2008, various cooling measures have been implemented to prevent them from happening in Singapore.
The LTV controls specifically, are meant to eliminate the potential of negative equity.
The more down payment a home buyer or property investor puts pays upfront, the less likely for negative equity to occur as there is already considerable equity in the house.
A huge drawback of owning a house in negative equity is that selling the house would be a tough decision to make.
This is because since the house has a lower value than the home loan balance, selling it means that the total sales proceeds would not be enough to cover the housing debt.
And as lenders have a due on sale clause in loan agreements, the bank would demand for full repayment immediately. This only puts the homeowner under more stress.
Borrowers in negative equity have their choices limited, if there are any at all.
Unless you are cash rich with cash to burn, the best course of action is probably to stay obedient and continue paying the mortgage obligations and hope that the lender would call you to deliver bad news.
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