Negative equity takes place when the outstanding balance on your home loan is higher than the current market value of your property. If you wanted to sell at this point, you would still have to pay in the difference and would not have the ability to put the proceeds towards buying a new property.
You would have nothing to show for all your years of meeting your monthly bond repayments. And if there is a significant difference between your outstanding balance and the sale price of your property, you could be in serious financial difficulties.
Although the property market has been surprisingly buoyant despite the Covid 19 pandemic, the price growth rate already started slowing down earlier in the year. FOR THE SECOND QUARTER, the FNB Residential Property Barometer reported that the house price growth slowed for the first time following eleven months of successive gains in almost a year. As a result, FNB House Price Inflation annual house price appreciation slowed in May 2021 to 4.1% year on year from 4.6% in April 2021.
There is a possibility that property values could fall if there are fewer buyers in the market and the supply of homes begins to exceed demand. However, there are almost always fewer buyers than sellers when times are tough, and the increasing interest rate could encourage would-be buyers to adopt a wait-and-see attitude.
Many property owners might find themselves in a negative equity position in this situation. However, this may not be a problem if you can wait for property prices to increase again once the economy recovers and demand begins to exceed supply as part of the standard property cycle.
In tough economic times, there is a much greater risk of losing your job, and you may be obliged to sell your home because you can no longer afford the monthly repayments.
If you owe more on your property than you can sell it for, you will have to pay in the outstanding amount at a time when you can least afford to. You will gain nothing from the property sale to put down as a deposit on another home. In the worst-case scenario, you could have a debt judgment against you and lose your credit rating for several years if you cannot pay your outstanding debts.
The best thing you can do as a homeowner is to keep putting whatever spare cash is available - as well as any non-emergency savings - into your home loan account.
If interest rates don’t increase rapidly, you should regard this as a bonus and keep paying the same instalments as you do now to further reduce your loan's capital portion.
Meanwhile, investors and homebuyers may find some excellent buying opportunities in the next few months. But they also need to guard against the potential for negative equity by putting down significant deposits so that they immediately have considerable equity in their properties.
With a big deposit, buyers will also be in a strong position when negotiating the price. Negotiating the fee could result in savings on monthly bond repayments and allow for putting that extra money towards paying off their home loans faster.