Negative equityis a term that strikes fear into the hearts of many mortgage holders, especially given the large number of homeowners who fell into this trap between 1997 and 2003. The Hong Kong Monetary Authority (HKMA) announced that negative equity cases in the second quarter of 2025 dropped to 37,806 from 40,741 in the first quarter. So, what exactly is negative equity? What are its causes? And how can you avoid it? This guide will break it down for you.
What is Negative Equity?
Negative equityrefers to a situation where a property's market value is lower than the remaining mortgage loan amount, leading to a state of insolvency. For example, if you buy a property for HK 6 million with a 90% mortgage, your loan amount is HK 5.4 million. Over time, your outstanding loan might decrease to HK 5 million. However, if the property's value then drops below HK 5 million, your property is in negative equity.
Causes of Negative Equity
There are two primary factors that lead to negative equity:
- Significant drop in property prices:When the property market experiences a sharp downturn, property valuations decline.
- Taking out a high loan-to-value (LTV) mortgage:Homeowners who take out a 90% mortgage can easily fall into negative equity if property prices drop by more than 10%. In contrast, those with a lower LTV mortgage are at a much lower risk.
Negative Equity vs. Repossessed Properties
Repossessed Property(also known as a "silver plate property") is one that has been legally seized by the lender (e.g., a bank) because the homeowner has failed to make timely mortgage payments over an extended period. The property is then sold or auctioned to settle the outstanding debt.
Many people mistakenly believe that a market downturn will lead to a surge in negative equity cases and, consequently, an increase in repossessed properties. However, there is no direct causal link between negative equity and repossession. As long as a homeowner in negative equity can maintain a stable income and continue to make timely payments, the bank will not repossess the property.
Will Banks "Call Loans" in Cases of Negative Equity?
"Call a loan" refers to a bank demanding a borrower to immediately repay all or part of their outstanding loan.
An increase in negative equity cases does not necessarily mean homeowners are unable to make their payments. Since the implementation of stress tests in 2010, the repayment ability of Hong Kong homeowners has remained solid. As long as borrowers make their monthly payments on time, banks generally will not "call a loan" on those in negative equity.
How to Avoid Negative Equity?
- Avoid High Loan-to-Value (LTV) Mortgages: For properties valued at HK$10 million or less, you can apply for a mortgage of up to 90% LTV with mortgage insurance. However, if property prices fall by more than 10%, you can easily fall into negative equity. It is generally safer to keep your mortgage at 80% LTV or below.
- Pay Close to the Market Price: Prospective buyers should try to avoid purchasing a property at a price significantly higher than the current market value. When the market corrects, overvalued properties are more prone to a sharp drop in valuation, which could ultimately lead to negative equity.