Negative equity: What is it and should you care if you’re in it?

Unless you’ve had your head under a pillow, most people have been hearing the scary phrase “negative equity”.

In super simple terms it’s the gap between what a homeowner has borrowed and what their house is now worth.

Negative equity is a situation more people have found themselves in with house prices dropping almost everywhere and interest rates increasing.

But some people are dealing with the situation by simply ignoring it according to loan expert Bruce Patten from Loan Market.

He told Stuff Explained host Jess McCarthy that many homeowners are just putting their heads down and paying off the mortgage rather than watching home values drop.

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“Most people won’t even notice.They’ll only notice in two, three, five, 10 years when they come to sell their house,” he said.

“That’s the best way to approach it,” Patten said.

“If there’s no problem with affordability, you have to ride it out. If you sell up now, you’re actually crystallising that loss.”

The Reserve Bank is due to make its next Official Cash Rate announcement on Wednesday.

In October, it hiked the OCR by another 50 basis points to 3.5%, the highest level since mid-2015 and the eighth consecutive rise in a row.

Even though Patten thinks 2023 will be a very tough year, he isn’t expecting this current storm of dropping house prices and increasing interest rates to continue for long.

But some will get into trouble paying their mortgage or will have to sell because of a whole variety of reasons including relationship breakdowns.

In those situations he said, communication was key to work out the best solution possible.

“You talk to your lender first, either through your mortgage adviser or directly with the bank, to say what is happening and the reasons you’re selling and the fact that you may have a deficit.”

Patten was hopeful banks would do their best to help homeowners find the least costly way forward.

Stuff Explained is our new podcast demystifying stories big and small, helping you to make sense of the world you live in. Find more at stuff.co.nz or wherever you get your podcasts, where you can follow and “like” the programme to help others find us.