What’s bigger: the outstanding balance on your mortgage or the market value of your home? Are you one of the growing number of Aussies that’s fallen into the negative equity trap and what can you do about it?
Negative equity refers to a situation where the outstanding amount on someone’s mortgage is greater than the value of their home. This simply means that your mortgage would still be outstanding even if you sold your home for what it is now.
Damian Smith, RateCity CEO, said that falling median home prices could indicate more mortgage-holders moving into negative equity.
“Some borrowers looking to refinance this year could be in for a nasty shock when they discover that a reduction in their home’s value has turned back the clock on their mortgage situation,” said Mr Smith.
Negative equity borrowers have a higher likelihood of having borrowed large amounts against their home, with a loan-to-value ratio of 95%. It can be difficult to switch to another lender or refinance your loan to get a lower interest rate if you have a high LVR.
To reduce their debt, borrowers with negative equity may need to make additional repayments. If that is too difficult, you can increase the frequency of your repayments without raising the amount of the debt you’re paying back.
Even though it may take some discipline, you should use any money (such as a refund from taxes) towards your mortgage payments.
Variable home loan holders will feel less stressed due to the Reserve Bank’s interest rate cuts.
Before you apply for a loan, consider hiring a property appraiser.
If you’re knee-deep in negative equity and unable to refinance your home loan now, Smith recommends researching the mortgage market, so that you can negotiate a more competitive rate with your current lender.
Some home loans come with a ‘no negative equity’ guarantee, which caps outstanding debt at the value of your home. This usually doesn’t come without terms and conditions.
You must not fall into negative equity
1. It is important to borrow responsiblyDo not take out loans with high LVRs (go to less than 90%) and instead put down a large deposit.
2. Get extra repayments don’t just settle for making the minimum repayments. You have the option to pay more or to make your repayments more often if you wish. You’ll reduce your outstanding balance and swim out of the negative equity rip.
3. Don’t redraw on your mortgage: if you’re serious about paying off your home loan, it would be wise to not withdraw those repayments you made unless your miles ahead of your repayment schedule.
4. AA downturn is not a good time to sellAustralian Property Monitors reported that the national property market fell 3.5% between September 2011 and the year before. Whilst it’s tempting to sell your home immediately, you’ll pinch yourself doing so if the property market is not strong. It’s best to wait for prices to pick up again.