Negative equity

From ACT Wiki
Jump to navigationJump to search

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.

See also