House prices are falling across Australia. On a macro level, that’s a positive thing as the market corrects itself. But on a personal level, you may be worried about the decreasing value of your home. What happens if your property value dips below the balance on your home loan? Let’s talk negative equity and your mortgage.
Recent declines in house sale prices and auction clearance rates have been causing concern across Australia. Understandably, homeowners and investors want to know what a drop in property values might mean for them.
If you have a significant balance left on your mortgage when property values fall, it could mean negative equity.
Negative equity is when the current market value of your home dips below the amount you owe on the loan. For example, if your home is now worth $700,000 but your loan balance is $720,000, you have negative equity of $20,000.
This is more common than you might think. Across Australia, there are home owners who purchased their first home using the Australian Government 5% Deposit Scheme (the 5% Deposit Scheme) that allowed them to buy the home with just a 5% deposit. However, in some cases, property prices fell soon after settlement, in fact it fell by more than 5%, leaving them in the position of owing more on the home than it’s currently worth – despite making every repayment on time.
The 5% Deposit Scheme is just one situation where a home buyer might find themselves in negative equity. Property values can stall or drop for a number of reasons, including:
This risk can often be greater for buyers who purchased with a small deposit because they begin with less equity in the property. It may also take longer to build equity when cost-of-living pressures, job instability or higher mortgage repayments make it difficult to pay more than the minimum amount required.
Most often negative equity results from a combination of these circumstances. Let’s take our home buyer above. Imagine that several months after the purchase, the property prices in the buyer’s area fall by more than 5%. At the same time, the rising cost of living means they’re only able to make the minimum mortgage repayments, so they’re rebuilding equity much more slowly than they had hoped.
So, what can they do about it?
If you’re in this situation, remain calm. Negative equity isn’t necessarily a pressing problem. It only becomes an issue if you’re unable to meet repayments and need to sell or refinance your property immediately.
For most homeowners, this won’t be the case. Most people buy property with a long-term outlook, and it’s common for the property market to experience periods of growth and decline over the life of a mortgage. If you can continue making your repayments and don’t need to sell, there’s every chance your equity position will improve over time as your loan balance reduces and property values recover.
Remember, though negative equity can be unsettling, it doesn’t automatically mean you’ve made a bad financial decision or that you need to take immediate action. However, there are some steps you can take to minimise any negative impacts.
Property values are never static; they move constantly. So just as they’ve been rising persistently for years, they also need to fall at some point. And it’s inevitable we’ll see another rise in the future.
In fact, Cotality (formerly CoreLogic) data covering 40 years of the market found there have been only six periods when national housing values fell, and only once did that decline exceed 5%. This means that if you can hold onto the property for the long term, there’s no need to panic right now.
As long as you have the ability to continue paying off your loan while waiting for the market to recover, you should see another rise in values in the future.
Of course, if you’re struggling to meet your loan repayments, now is the time to act. Your lender should have a hardship team that can offer assistance.
Ideally, your first step would be to reach out to your broker, who can assess your situation and review your options. They can also contact your lender on your behalf.
Having a broker to advocate for you can help contain the stress of the situation. Trusted broker teams like Stapleton Finance have experience navigating these tough conversations with lenders to achieve the best results for you.
If you do need to sell your home quickly, and aren’t able to give property values time to fully recover, you can also try to rebuild the equity in the property before the sale date. This will give you the best chance of recovering any potential loss.
Ways to build your equity include:
If you’re concerned about negative equity and your mortgage, you don’t have to solve the problem on your own. The team at Stapleton Finance can investigate your options, review your best approach and speak with your lender about the next practical step.
If you’d like support to navigate negative equity in your mortgage, get in touch with our team. We’re here to share our guidance and support.
Ready to explore your options? Reach out to Stapleton Finance today.
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