Planning needed to beat negative equity

If home owners want to avoid the negative equity "monster", they will need to do some forward planning.

"Amid all the positive news about the recovery of the real estate market, we should not lose sight of the fact that negative equity is what did most of the damage to home owners during the 2008/09 recession - and remains a danger for every new generation of buyers," RealNet estate agency group said in a statement on Wednesday.

Negative equity occurs when the outstanding balance on a home loan is bigger than the current market value of the property.

Tjaart van der Walt, RealNet CEO, warned that negative equity could "bite hard" when sharply rising interest rates made 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.

"In such market conditions, the struggling home owner 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," Van der Walt said.

Even worse, the home owner would still be indebted for the difference, and gain nothing from the sale to put towards buying another home.

However, 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.

"Those worst affected and most at risk of losing their homes during the recession were those who had bought when home prices were peaking in 2007, and especially those who had taken out 100 percent or even 108 percent loans to do so."

Van der Walt said that when a home owner had little or no equity in his property, values did not have to fall very far to put you him into a negative situation.

"On the other hand, those who paid substantial deposits on their homes or worked hard to reduce their home loan balances and build equity in their homes were mostly able to ride out the recession quite comfortably."

He said another vital lesson was not to over-borrow.

"Rather buy a less expensive home, pay a deposit and give yourself lots of room to manoeuvre, bearing in mind that market conditions can change at any time... then sit back and watch negative equity slink back into the shadows." - Sapa

Article from: www.busrep.co.za