After Australia’s home values suffered through their largest and fastest fall on record, the threat of negative equity is undoubtedly keeping many borrowers up at night.
Especially considering the nation experienced an 8.4% decline in property prices since the peak in June last year.
If property prices were to fall a further 10%, the RBA predicts the number of borrowers in negative equity could jump from 0.5% to 1%.
Compare the Market’s recent research revealed the generation most likely to fall into arrears is Gen Z, with more than 22% of them admitting to missing a mortgage repayment within the last 12 months.
The data also showed Boomers were the least likely to miss a mortgage repayment (7.5%), followed by millennials (12.3%) then Gen X (11%).
Compare the Market’s General Manager of Money, Stephen Zeller said negative equity is quite concerning for both borrowers and lenders.
“This is a real-life nightmare that some Australian homeowners are living right now,” Mr Zeller said.
“Especially those who might have borrowed close to their maximum amount with a high loan-to-value ratio. Those homeowners tend to have small buffers against market prices,” Mr Zeller said.
“The threat of negative equity is now a very daunting reality to borrowers after nine consecutive interest rate rises triggered record-breaking price drops.
“For example, let’s say someone buys an apartment for $400,000 and borrows $350,000 from the bank, but an identical apartment the floor below sells for $300,000, then this could mean the person is in a position of negative equity.
“Therefore, this person might find it more difficult to refinance their property because switching lenders involves a valuation by the bank, and in most circumstances, a lender won’t loan you more money than what your home is worth.
“So, if your property is in a position of negative equity, refinancing might not be possible”.
Mr Zeller said this is why it’s important to have high liquidity buffers – for emergencies like this.
“With interest rates continuing to rise, we will no doubt see households and businesses struggling to pay their loans back. We are already seeing a steady increase in loan arrears with December being 0.76%, up from 0.65% in November.
“It was 0.58% in September and 0.22% in September 2021, so the numbers clearly indicate savings and redraw buffers are starting to run out”.
For Australians on a variable rate home loan, here’s how a 25 basis point increase in the cash rate, if passed on by the lender in full, would affect monthly repayments:
|Mortgage size||25 basis point increase to 5.75% p.a.|
|Increase in monthly minimum repayments||Increase over the life of the loan|
|Monthly repayments do not include any reduction in the mortgage balance over time. These calculations assume: An owner-occupied variable interest rate of 5.50% p.a; principal and interest (P&I) repayments; cash rate increases are passed on in full; the loan term is 30 years; and there are no monthly fees.|
Australians with a $700,000 mortgage will likely soon be paying $1,566 more each month than they were at the start of May 2022, following a 350 basis point jump in just nine months.
|Mortgage size||Increase in average monthly repayments since the start of May 2022 (350 basis points)|
|Reserve Bank Lenders’ Interest Rates. Monthly repayments do not include any reduction in the mortgage balance over time. These calculations assume: An owner-occupied variable interest rate of 2.86% p.a in May 2022; principal and interest (P&I) repayments; cash rate increases are passed on in full; the loan term is 30 years; and there are no monthly fees.|
Mr Zeller’s tips for customers who might be struggling to make repayment or who need to reduce the negative equity on their property:
Talking with your lender
“Speak to your lender to see what options are available to you,” Mr Zeller said. “For example, if you have a 20-year loan, you could look at extending this loan to 30 or even 35 years, granted you will still be working during that term and will not be retiring,” Mr Zeller said. “If a borrower is falling behind in payments, a loan extension can help the borrower get back on track, re-evaluate their budget and see where the money is going and where they can cut costs. That doesn’t come without its pitfalls though, as it will mean more interest payable over the life of your loan. Another option could be to go interest-only for a set time period.
Make more mortgage repayments
“Borrowers can choose to make additional mortgage repayments to reduce their home loans faster,” Mr Zeller said. “For example, making the repayments fortnightly instead of monthly, could improve your equity position. You don’t need to talk to the lender to make additional repayments unless it is a fixed-rate loan where bulk repayments may be limited. The agreement with the bank is to ensure the minimum loan repayment is met”.
Negotiate a lower rate
There’s an unprecedented number of cashbacks offers attached to low rates right now. “Banks and institutions are fighting each other for your business,” Mr Zeller said.
“If you’re going to speak to your lender to ask for a lower rate, tell them about the lower rates available at other banks and ask if they can match those rates for you. You could even threaten to leave, because, at the end of the day, banks are making money off your loan – surely, they wouldn’t want to lose your business and money.
“Those who aren’t struggling to meet repayments should still consider paying the higher amount if they secure a lower rate – this will help reduce the negative equity on their property faster and help pay off your loan sooner.
“Renovating your property can improve its value, but it’s important to consult a real estate agent or design specialist first,” Mr Zeller said. “It doesn’t matter how capable you are, I bet even Scotty Cam from The Block asks for a specialist’s opinion – because you need to be 100% sure the renovations are going to increase the property’s value. If you have savings, you could look at renovating the kitchen or bathroom as an investment to modernise the property”. Mr Zeller said it’s important to consider your financial circumstances before making any decisions, so you don’t increase your debt.
There a hardship programs available to those struggling to make repayments. Mr Zeller said one can speak to their lender about Hardship programs. “Even if you’re making those repayments but are struggling with grocery costs or other bills, you should book an appointment with your lender,” Mr Zeller said. “They can help you re-evaluate your finances to see where your money is going and give advice on your options. You can also do this yourself with a spreadsheet or in a journal.”
Mr Zeller said flood-affected households across Australia are facing significant challenges. “To ease some of these financial challenges, government disaster-relief payments and hardship assistance from lenders have been made available,” he said. “Financial hardship can include unemployment, serious illness or injury, the loss of a loved one, family and domestic violence, COVID-19, and a business downturn.
“But you have to contact your lender to explain why you’re in hardship, ask for an arrangement you can afford, and formulate a plan to resume normal repayments. For example, if you lose your job, you could explain this and ask for payments to be paused for six months while you look for a new job and resume payments when you secure a new job. The bank will report you’ve received hardship assistance on your credit report but this shouldn’t affect your credit rating. Mr Zeller said when the bank agrees to a deferral they still have to report the payments as being made on time.
Sell your property
“If the bank is unhappy with the amount of negative equity you have accrued and you can’t contribute any further capital they have asked for, they can repossess your property – although this is very unlikely,” Mr Zeller said.
“This would be a last resort and has been uncommon for a long time because property prices have been so strong. The last crash would have been in 2007 – 2009 in the Global Financial Crisis.
“But if you’re under financial stress, it’s critical to think about whether selling is the right option for you to prevent further debt. The trouble with selling right now is that there’s no guarantee that you’ll get your money back. Because if you’re forced to sell your home in the same market that put you in negative equity, then it’s likely you’ll get less than what you originally paid for it.
“A good real estate agent could have the marketing power to find the right buyers and price for your property. Remember, if there’s an offer on the table that you don’t like, you may decide against selling”.
For more information, please contact:
Natasha Innes | 0416 705 514 | [email protected]
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