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If the value of your property falls below the amount of money left on your mortgage then you're in negative equity.
This guide will explain how negative equity works, show you how to sell your property and offer some possible alternatives to selling.
Equity is the value of your property minus any debts you have left on the property (like your mortgage).
Let's say you took out a loan of $450,000 to buy a property for $500,000 (so you had a deposit of $50,000). But the market value of the property has since fallen to $400,000. If you still owe $430,000 on your mortgage but you elect to sell the property now, you will still have $30,000 remaining on the mortgage that you will need to pay off.
Negative equity can be caused by a number of factors, including:
If you have negative equity in your home but you need to sell it, you still need to repay the full amount owing on your mortgage.
But before the sale of your property can go through, you will need to obtain approval from your bank. John Costa, Mortgage Choice broker from North Melbourne, says that if you sell your home for less than the balance owing on your mortgage, "the bank will take a number of steps prior to allowing the sale settlement to proceed."
Costa outlines the steps your bank may take:
Negative equity also makes it quite difficult to refinance your loan with a different lender and lock in a better interest rate, so it's important that you take steps to avoid negative equity wherever possible.
Here are some actions you could take before (or instead) of selling.
You may be able to turn things around or avoid sliding into negative equity by trying the following:
It's important to work out whether or not you need to sell the property right now. Is the market expected to fall further in the coming years, resulting in an even bigger gap between the value of your property and the amount you owe on your mortgage? Or might you be better off simply holding onto your property and waiting for the housing market to recover?
If you think property's value is only going to decline further then selling sooner rather than later could prevent bigger losses.
If you're a property investor, riding out a downturn can be easier. Rental income from tenants can help cover mortgage repayments and you can offset losses from your tax. But if you're struggling to find tenants, can only charge a small amount of rent and you're not confident that prices will rise soon enough you might decide to that selling is still better.
Get a real estate agent's advice on selling the property before you make any decisions. They probably have a better idea of the market than you do. And they might be able to advise you on a strategy.
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The vendor of a property has a $480,000 mortgage. The purchase price of the house was $720,000. Is this a problem? Please give reasons for either yes or no.
Hi Nerka!
Thanks for the comment.
Generally, it is more desirable to have a higher selling value than the amount of remaining mortgage.
If you need a professional advice who would take into consideration your personal circumstances, you may look for it here.
Hope this helps.
Cheers,
Jonathan