When a situation arises, that the market value of the owner occupier's property falls below what his mortgage is, it is a negative equity situation.
By making it possible in the first place to purchase the house because of easy loans, many have gone ahead and bought. They were happy, because the property was rising in value, and it was even possible to keep borrowing more money against it.
Naturally, business was booming, money was being spent on all sorts of things like cars, televisions, holidays, etc.
A general sense of well- being and confidence emerged. All governments love this kind of state of affairs, and everybody is happy.
When things begin to change dramatically, it brings problems of huge proportions. It likes to be seen by many, as a general problem rather than a personal one.
Negative equity, one of the boom and bust economy consequences, is bad news
as it can also lead to many other problems. The feel good factor is gone, and worry sets in. Less money on the table means fewer goods are purchased, which calls for less demand to produce them, thus less jobs. Many mortgage payments are not being kept up, and repossession dangers come into the equation.
All this can lead to other far reaching repercussions, which in turn can have an effect on many who are not even in the negative equity trap.
There are a number of people, who believe that the shortage of money factor does not always lie in the inequality of opportunity, but often in the inequality of performance. They believe, it is vital to raise the output of personal effort to make ends meet, rather than making it a problem which everybody else must automatically pay for, apart from some cases, where hardship will set in, come what may.
While the remarkable ease to obtain credit was promoting plenty of business and everything was buzzing, it also sucked in an army of people who were not really ready to take on the responsibilities in paying back money borrowed.
Negative equity can lead to social troubles. Also, whenever personal debt starts growing with no visible way out, it causes the problem of loss of consumer confidence.
Recently tax payers have been forced to pay towards the propping up of one financial institution already, and who is to say there will not be repeat performances.
The signs are, it will be more difficult to borrow money, even for worthy customers. Businesses will find it harder to get the credit they need, and all sorts of difficulties will follow.
The irresponsible lending which caused so called happiness, will now result in pain to lender and borrower.
Now let us look at things with less gloom. Firstly, there is the group of people who bought their houses at prices which were relatively low, assuming of course that they have not been topping up their mortgage loans on the strength of the rising prices of property. They would have some way to go before getting into a negative equity territory just yet.
Then there is the other group who bought their houses at an already spiralled upwards price, and are in a more dangerous position.
It is to be noted, that albeit repossession is of course a threat if payments are not kept up, and that some companies start getting worried even after a couple of months of arrears. They can take action by going to the County Court to get a possession action so that they can sell the house and recover their money. Of course there is normally a period of writing and offer making, and solicitors start writing etc., which extends the time before anything does happen.
Most of all this can be avoided, if proper action is taken early. There are a number of expert companies which handle these situations remarkably well. You can argue on terms with the mortgage companies for a start. There are ways how you can rent back your own home, in other words remain in your home as a tenant, and various other ways to pursue.
It is always prudent to be prepared to meet problems or find a way to get out of their way. It may be better to get a smaller house or a flat while there is time. It may be better to sell and move abroad while there is time. Every individual has different problems and possibilities.
There are some very helpful estate agents both here and abroad with nice deals on their books which might be good to consider. To get foreign money, there are some really good foreign currency exchange companies who will give better rates of exchange than most high street banks should one wish to sell and buy abroad.
By being prudent in the future, by extra hard work and looking for the best bargains, things will in due course get sorted out. They will not get sorted out by borrowing to get out of trouble, without a clear reason and plan how to pay it all back.
Paul Dubsky is director of Foreign Currency Exchange & Transfers Ltd. The company is focused on being able to offer really friendly currency exchange rates and international money transfers. We believe we are the only Foreign Currency Exchange company which offers special rates to Senior Citizens.