Negative equity: Difference between revisions
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imported>Doug Williamson (Add 2nd and 3rd definitions. Source: Corporate Finance Institute https://corporatefinanceinstitute.com/resources/knowledge/finance/negative-equity/) |
imported>Doug Williamson m (Typo correction.) |
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1. ''Net asset value - individual assets.'' | 1. ''Net asset value - individual assets.'' | ||
In relation to individual assets, negative equity is the situation where the value of an asset is less | In relation to individual assets, negative equity is the situation where the value of an asset is less than the amount of a debt relating to it or secured on it. | ||
Latest revision as of 16:51, 25 March 2021
1. Net asset value - individual assets.
In relation to individual assets, negative equity is the situation where the value of an asset is less than the amount of a debt relating to it or secured on it.
- Example: Negative equity
- A house is worth EUR 400k.
- A borrowing of EUR 300k is secured by a mortgage over the house.
- The net worth is the difference between the value of the the house (asset) EUR 400k and the borrowing (liability) EUR 300k
- 400k - 300k = EUR 100k
- The Equity in the house is the difference between the current value, and any loans secured over it.
- This is also EUR 100k.
- If the value of the house falls to EUR 250k, the borrowing now exceeds the value of the asset.
- This is 'negative equity' (of EUR 50k = 250k - 300k).
2. Cumulative corporate losses.
A situation where an organisation's total liabilities exceed its total assets.
The balance sheet total is negative.
This is normally a result of cumulative losses over a number of periods.
3. Individual net worth.
A situation where an individual's total liabilities exceed their total assets.
