Buy early and low to beat neg­a­tive eq­uity

Business Day - Home Front - - HOMEFRONT -

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.

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