The frightening scenario being painted for recent home buyers is easy to understand.

You buy a house for $1 million, borrow $950,000 and then house prices fall. Suddenly the house is worth $900,000, but you still owe the bank $950,000.

You are now in negative equity.

Cue the headlines about homeowners being trapped, banks facing losses and the property market spiralling into crisis.

But there is one rather important part of this scenario that tends to get overlooked – the bank really, really wants you to keep paying your mortgage.

That simple, seemingly obvious, fact is why negative equity is not necessarily the catastrophe it is sometimes made out to be.

Banks are in competition with each other for borrowers, particularly in the current market. They want mortgages that keep generating interest payments, not houses, and certainly not houses worth less than what they are owed.

What really matters to lenders is that borrowers keep making repayments.

The moment that changes is often when things go south – for the bank as well as the homeowner. That is when the $50,000 gap between what the home is worth and what the bank is owed goes from being a number on paper to a real problem.

If the bank takes possession of the house and sells it for........

© The New Daily