Negative equity: what are the options?

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Stacks of coins with house

Although the housing market is improving, house price expectations are still grim. As a result, a lot of home owners that are looking to sell will be confronted with sales proceeds that are insufficient to pay off their current mortgage. In other words, negative equity.

Negative equity is quite a financial setback. To soften the pain: the interest on a residual debt from the sale of the house can be deducted from taxable income for a duration of five years. This only applies, however, to residual debt incurred between 29 October 2012 and 31 December 2017. With this measure, the cabinet wants to ease the burden of owners with negative equity.

Conditions

The deductibility of interest and other loan expenses does not depend on whether the borrower is paying down the residual debt. But after five years, both interest and expenses can no longer be deducted. The tax relief is also available to borrowers who plan on renting after selling their house. To qualify, they are not obliged to buy a new home after selling their old one.

Causes of negative equity

Several scenarios can lead to negative equity. For example, the value of the home has declined over the years. Or a consumer has borrowed more than the house is worth. Alternatively, a consumer may have taken out an interest-only mortgage, without having made any repayments in the meantime or having saved in order to pay off the mortgage at the end of the term in a lump sum.

Unexpected situations

Negative equity is not an issue if the home owner is not planning on selling. However, there are some situations in which they suddenly have no choice but to sell. These include divorce, additions to the family, unemployment, disability or the death of their partner.

Moving

Negative equity need not stop home owners from moving. If needed, ABN AMRO can incorporate the negative equity into the new mortgage. The bank has set some conditions, however. Customers with negative equity can borrow up to a maximum of 115 per cent of the market value of the new home. This loan must be used to buy the new home and repay the residual debt on the old one. This option is only available to existing ABN AMRO customers. Naturally, the bank can only offer this service if the customer’s income is sufficient.

Online information portal

In February 2014, the Dutch Banking Association (NVB) launched the online information portal www.restschuldinfo.nl. Through this portal, the NVB informs home owners about their options if they are confronted with (impending) negative equity.

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