Negative equity: what it means and what you can do about it.

As a homeowner, you can usually rely on the value of your property going up over time. But when significant events impact our economy, lower demand for property can result in falling house prices. If a property downturn should happen, you could find your home is in ‘negative equity.’

Equity is the difference between what your home is worth and any loan you have secured on it. Equity in your home will go up as you pay down your mortgage and property values rise. But if the market value of your property falls below the balance of your mortgage, then you’re in negative equity.

If you can, it’s a good idea to reduce your negative equity, so you’re in a better position if the time comes to sell or refinance your home. Here are four tips to help you get back in the black:

• Make extra payments on your mortgage – by paying off your mortgage faster, you’ll have a lower balance owing when you sell or refinance. You’ll need to check with your lender that you can make extra payments on your loan without having to pay any fees.
• Arrange a valuation – it’s hard to know what your equity position is if you don’t know what your home would sell for in today’s market. Arranging an independent valuation can give you a better idea of the difference between the value of your home and the balance of your mortgage.
• Avoid redrawing from your mortgage – if you have a redraw facility for your home loan and have paid extra onto your mortgage in the past, try to leave the funds where they are. If the property market is in a slump, getting ahead on your mortgage is even more important.
• Do some renovations – making simple improvements can give your home a lift in value, potentially reducing the gap between your mortgage balance and the sale price of your home. Focusing on improvements that buyers want will add the most value.

If you’re able to wait out a dip in property values before selling your home, this can help you avoid the impact of a negative equity situation. By putting off selling until the market recovers, you’ll be in a position to negotiate a higher price and should be able to avoid digging into your own pocket to pay back your mortgage.

If you don’t need to sell your home, then negative equity may not be a problem for you. But if you do need to sell, you’ll be paying back the remaining balance on your mortgage, even if there’s a shortfall from the sale of your property. You’ll need to find the money to settle the full amount, perhaps from your savings or the sale of other assets.

Negative equity can also make things difficult if you’re looking to refinance your mortgage to get a lower interest rate. Switching to a different lender is going to involve an independent valuation of your property. This will limit the amount you can borrow to a percentage of your home’s current value. If you’re in negative equity, this could be much less than your current mortgage.