What to Do If You’re in Negative Equity
Negative equity is a challenging financial situation where the outstanding balance on your mortgage exceeds the current market value of your property. This can occur due to a decline in property values, economic downturns, or rising interest rates. For homeowners, being in negative equity can feel overwhelming, but there are steps you can take to navigate this situation effectively.
Understanding Negative Equity
Negative equity, also known as being “underwater” or “upside down” on your mortgage, means that if you were to sell your property, the sale proceeds would not be enough to cover the remaining mortgage balance. According to Kiwibank, negative equity occurs when a house price falls to the point where the owner owes more on their home loan than the house is worth. This situation has become more common as property prices have dropped in many areas, coupled with increasing interest rates.
Assessing Your Situation
- Calculate Your Equity: Start by determining the current market value of your property and compare it to your outstanding mortgage balance. This will give you a clear picture of your equity position. If your mortgage exceeds the property’s value, you are in negative equity.
- Review Your Financial Position: Assess your overall financial situation, including income, expenses, and other debts. Understanding your cash flow will help you make informed decisions about managing your mortgage and other financial obligations.
- Consider Your Long-Term Plans: Think about your long-term goals and how your current property fits into those plans. If you intend to stay in the home for an extended period, you may be able to ride out the market fluctuations and wait for property values to recover.
Options for Managing Negative Equity
- Stay Put and Wait for Recovery: If you can afford your mortgage payments and have no immediate need to move, consider staying in your home and waiting for the market to recover. Property values may increase over time, improving your equity position. According to a Reddit discussion, holding onto the asset and avoiding realising losses can be a viable strategy if you can manage the financial burden.
- Rent Out the Property: If you’re struggling with mortgage payments, consider renting out your property to generate additional income. This can help cover the mortgage and potentially provide some extra cash flow. You could also move to a more affordable rental property yourself and rent out your entire home.
- Negotiate with Your Lender: Reach out to your lender to discuss your situation. They may offer solutions such as refinancing, extending the loan term, or temporarily reducing payments. It’s essential to communicate with your lender early to explore available options.
- Increase Your Income: Consider ways to boost your income, such as taking on additional work or side gigs. Increasing your income can help you manage mortgage payments and reduce financial stress.
- Sell the Property: Selling your property in negative equity is an option, but it means you’ll need to cover the shortfall between the sale price and the mortgage balance. This might involve using savings or negotiating with your lender to cover the difference.
- Seek Professional Advice: Consult with a financial advisor or mortgage broker to explore your options. They can provide personalised advice and help you develop a strategy to manage your negative equity situation.
Potential Risks and Considerations
- Market Uncertainty: Property values can be unpredictable, and there’s no guarantee that the market will recover quickly. Consider the potential risks of waiting for a market recovery and how it aligns with your financial goals.
- Impact on Credit Score: Missing mortgage payments or defaulting on your loan can negatively impact your credit score. It’s crucial to maintain open communication with your lender and explore alternatives before defaulting.
- Emotional Stress: Being in negative equity can be emotionally taxing. It’s important to stay informed, seek support, and make decisions based on your financial situation rather than emotions.
Negative equity is a challenging situation, but it’s not insurmountable. By assessing your financial position, exploring your options, and seeking professional advice, you can navigate this situation effectively. Whether you choose to stay put, rent out your property, or explore other solutions, taking proactive steps will help you manage negative equity and work towards a more secure financial future. Remember, you’re not alone, and there are resources and support available to help you through this challenging time.