Dealing with negative equity
Category News
Time to sell when you suddenly realise your property is in negative equity. This is where your property is worth less than the mortgage bond or where overcapitalisation expenditure on extensions and improvements leave you with a price below the value spent.
It is important to understand that there is a difference between the value that you attach to your property and the value that the market or a bank will attach to it. During an economic downturn for example, equity growth in property values slow dramatically and should you need to sell urgently, you may find that you cannot get the price that you paid for the property. If there is a home loan on it, you may find yourself with a shortfall or a negative equity situation.
It can be avoided, here’s how.
Beware of overcapitalising – it does not matter how big your house is, or how grand the finishes are, most neighbourhoods have a price ceiling and you are not likely to get your property sold if you price it above that level. It is therefore vital to ensure that you spend sensibly on extensions and improvements and keep these in line with the area.
Beware of overpaying – it is important to do your homework when you invest in a property, especially if it is in an area that you are not familiar with. Be sure to pay no more than fair market value and do not use property listings as your price guide. Ask the agent for a list of actual sales in the area so that you can see what prices are actually being achieved.
Invest cash into your home loan – aside from investing an upfront cash deposit when you buy your home, it is always advisable to invest further cash into your housing bond as often as you are able to. This will help build up a financial buffer against any sudden financial difficulty or interest rate and repayment hikes.
Shortfall when selling – if you do decide to go ahead with the sale of your property and the best offer that you can get still leaves you with a shortfall on your housing bond, then you will need to settle this before transfer of the property. If you do not have the funds, you will need to negotiate with the bank to convert that to a personal loan, but such an arrangement needs to be made upfront.
Author: Seeff
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