A popular idea that has been discussed in the past (and if Niamh Hennessy’s article proves correct may become working reality) is that of banks taking equity in the family home in exchange for reducing the debt on the property.
I’d like to go through this by looking at the differences in cost, the difference to the mortgage holder and to take a look at why it may not be a great idea.
The bank balance sheet currently looks like the picture to the right, the value of the asset (the loan) is based upon the amount of finance advanced, not the value of the underlying security.
Remember: When you put in your deposit, you are the first equity owner, if prices fall the owners equity is wiped out first which is why ‘negative equity’ is a talk about current value versus the mortgage secured and not just current value versus market value.
People who’s property fell 40% but who have no mortgage cannot crystallize …