Buy early and low to beat negative equity
AVOIDANCE 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, 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.”
Negative equity is the term 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. 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.”
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. The second vital lesson is not to overborrow or over-reach yourself financially, no matter how much you like a property.