Buy early and low to beat negative equity
If you want to avoid the negative equity “monster” that can swallow your home whole, you’ll need to do some forward planning.
So says Tjaart van der Walt, CEO of the RealNet estate agency group, who notes: “Amid all the positive news about the recovery of the real estate market, we should not lose sight of the fact that negative equity is what did most of the damage to homeowners during the 2008 / 09 recession – and remains a danger for every new generation of buyers.”
Negative equity, he explains, is the term for the situation when the outstanding balance on a home loan is bigger than the current market value of the property. “And it can bite hard when sharply rising interest rates make it difficult for the owner to pay the monthly loan instalments but at the same time cause housing demand to fall off and prices to decline.
“In such market conditions, the struggling homeowner who decides to sell his property rather than default on the loan and have it repossessed is, sadly, unlikely to realise even what he owes the bank. Even worse, he will still be indebted for the difference, and gain nothing from the sale to put towards buying another home.”
However, Van der Walt notes, the recession also provided some lessons about the best ways to avoid negative equity, the first being to try to buy at the start of a market upturn and not at the height of a boom. “Those worst affected and most at risk of losing their homes during the recession were those who had bought when home prices were peaking in 2007, and especially those who had taken out 100% or even 108% loans to do so.
“Clearly, when you have little or no equity in your property, values don’t have to fall very far to put you into a negative situation.”
On the other hand, he says, those who had paid substantial deposits on their homes or worked hard to reduce their home loan balances and build equity in their homes were mostly able to ride out the recession quite comfortably, “so the second vital lesson is not to over-borrow or over-reach yourself financially, no matter how much you like a property.
“Rather buy a less expensive home, pay a deposit and give yourself lots of room to manoeuvre, bearing in mind that market conditions can change at any time. Then sit back and watch negative equity slink back into the shadows.”
Issued by RealNet