What is an ‘Underwater Mortgage’ & are you stuck with one?

An underwater mortgage, also known as an upside down mortgage, is a borrower’s worst nightmare. What could be worse than owing more on your home than what it’s actually worth right now? Mortgage repayments can seem like a huge burden. This is especially true when you’re stuck paying for a house that you have little to no equity in.

When does a mortgage turn into an ‘underwater mortgage’?

We’ll explain the concept with a simple example. Let’s assume you bought a property for AED 1 Million in Dubai, and took a loan worth AED 750,000 against it. With property prices steadily dipping, the market value of your home has now reached AED 650,000. So now your mortgage is AED 100,000 more than the value of the property, resulting in your mortgage going ‘underwater’. The difference in current market value and original loan principal is also known as ‘negative equity’.

What can you do about it?

Being underwater on your mortgage can be disheartening, but it is not the end of the world. Unfortunately, there aren’t structured programs to deal with such cases in the UAE banking market. Countries like the US have short sale, loan modification and principal reduction options available to borrowers reeling under upside down mortgages.

However, you still have some practical options available to dig your way out of an underwater mortgage in the UAE. We’ve shortlisted these below:

Stick with it

As a home owner, you may naturally be emotionally attached to your home. One of the best ways to ride the ups and downs of the real estate market is to diligently pay down your mortgage debt. If you can afford the mortgage payments, you can simply stay put and build equity in the property overtime. Chances are the market would recover in a few years and you would have better refinance options available once you’re above the water on your mortgage.

Rent it out

Renting out your property and moving to a cheaper accommodation might be a financially sensible move. Doing so will allow you to save on monthly expenses and free up more cash to comfortably keep up with the loan repayments. However, you may still have to make up for the difference between the rental income and mortgage installments, if the rental market has taken an equally bad beating as real estate prices in the area.

Sell it

Selling the property is usually the last resort for borrowers. Selling makes sense for those looking to relocate or others who cannot justify paying interest on a mortgaged home that will likely never recover its original value. If you’re planning to go ahead with this option, you must be prepared to pay the difference between the sale price and outstanding loan amount to the bank, out of your own pocket. Make sure you have enough savings to tap into at short notice, since the bank will have to be repaid in full at the sale closing.

Negotiate with your lender

While another bank will not refinance your underwater mortgage, you can always speak to your current lender to revise the terms of your mortgage to ease the burden on you. Negotiating more favorable terms of repayment like a lower interest rate, can help take some of the sting out of the hefty mortgage repayments.