Borrowers facing negative equity
NEGATIVE equity is a fright that homeowners never want to face.
For those of you who are not sure what this means, it’s when the amount owing on a mortgage is bigger than the value of the property.
For years borrowers in many capital cities including Sydney and Melbourne have revelled in soaring housing prices. They’ve watched the value of their homes grow while their mortgages have gotten smaller.
But the Reserve Bank of Australia this month issued a stern warning to mortgage customers, informing them if the slide in the housing market continues it’s likely to impact them.
Nationally, house prices have fallen by 7 per cent over the year to March. But some of the hardest hit in recent years are in Perth, where prices have fallen by 18 per cent, and Darwin – 27 per cent – since their respective peaks in 2014. That’s frightening stuff. When I drive through some of Melbourne’s blue chip suburbs including Brighton, Albert Park and Toorak, it makes me wonder how people afford such palatial homes.
Old wealth perhaps, or high-paying jobs. Or maybe they’re just average Joes up to their eyeballs in debt.
I often wonder how many homes have a mortgage and, for those who do, how fat is it?
The RBA reported in its biannual financial stability review this month that it’s an unusual economic time in Australia and globally, “for property prices to be falling while interest rates and unemployment are low”.
Borrowers need to get smart and try to get ahead on their loans while interest rates are at record lows.
Owner occupiers can easily snare a mortgage rate starting with a “3” and, if they don’t, they’re only hurting themselves.
For a borrower with a $300,000 30-year home loan, if they get a good rate of 3.8 per cent and pump an extra $200 a month into the loan the difference is mammoth.
The borrower could shave six years and three months off their loan and save $47,000 in interest charges.
If you can’t chuck this much extra on your loan, try for a smaller amount – every extra cent counts.
When I signed up to my first mortgage in 2012 I felt like I was treading water; the amount owing wasn’t going anywhere. But I was able to tip in a bit more money and the difference was noticeable.
Here’s a fact from the RBA to consider: almost 30 per cent of home loans have little or no buffer.
Now these may be fixed loans where buffers are usually not permitted or those paying interest-only and perhaps keeping excess cash elsewhere.
But whatever the case, if you’re an owner occupier with a home loan, now’s the time to make some serious headway into your debt because, one thing’s for sure, rates won’t stay this low forever. @sophieelsworth
SOPHIE ELSWORTH