Finance
The property market is prone to change – and sometimes that involves drops in home values.
If you’re the owner of your ‘forever home’, this likely won’t be much of an issue. However, if you are a short term investor or are looking to refinance, you may experience difficulties.
Refinancing when you don’t have equity or your property’s value has decreased does present some challenges, but it’s not impossible.
Declines in property values can affect homeowners differently depending on individual circumstances.
If you are living in your ‘forever home’ that you don’t intend to sell, it’s likely that you won’t be impacted too much by decreasing housing values.
However, if you’ve purchased an entry-level home that you intend to sell soon and move into something pricier, your plans might be interrupted by a fall in your property’s value.
Additionally, if you want to get cash out, you may have troubles. Decreasing property values results in you having less equity in your home to tap into.
If your investment plans involve owning an investment property long term and enjoying the rental income, falling property prices may not have a significant impact on you.
However, short-term investors could find themselves not making the profit they had hoped to by selling their property.
Similarly to owner occupiers, refinancing your investment home loan can become more complicated if your property value declines.
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If your property’s value has dipped so much that your equity is less than 20%, you may experience some challenges when it comes to refinancing.
Refinancing when your Loan to Value Ratio (LVR) is above 80% (i.e. equity below 20%) is likely to incur Lenders Mortgage Insurance (LMI) charges. This can still apply even if you have previously paid LMI.
So in many cases, you will still be able to refinance if your house value goes down, but this won’t always be possible.
Refinancing to get cash out can become challenging and refinancing while you’re in negative equity can also be very difficult.
If the market value of your home drops below the value of your home loan balance, this means you are in negative equity.
For example, let’s say your home has dropped in value to $400,000, but your home loan balance is $450,000. This is what negative equity can look like.
Banks may be less willing to lend to borrowers in this situation as it comes with a lot of risk. Let’s say you have negative equity and also default on your loan repayments, your house no longer serves its purpose as collateral because it is worth less than the home loan.
Similarly, if you need to sell your home, negative equity presents a big problem – you’ll have to come up with the remaining money. If you don’t need to sell or refinance and are keeping on top of your mortgage repayments, it may not be a massive problem.
It’s uncommon for borrowers to experience negative equity as property prices tend to rise, rather than fall. However, it’s still important to be aware of the possibility and what to do.
There are three key things you can do when you suspect you have negative equity:
See how much cash you could access from your property.
Having higher home equity expands your refinancing options. A good way to increase equity is to increase your property’s value which could be simpler than you think. Here are some ways to increase the value of your property:
The difficult thing about attempting to increase equity and property value through renovations and home improvements is that it can require significant capital. And, if your equity is low – you might not be able to tap into it to help fund your projects.
So, to make your home improvements a reality, you may have to go the DIY route or find alternative ways to fund your project.
Now that we’ve established how property value declines impact homeowners differently and how this can affect refinancing, let’s look at some tips for refinancing:
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The information in this post is general in nature and should not be considered personal or financial advice. You should always seek professional advice or assistance before making any financial decisions.
Tags: home loan, equity, home equity, refinance, valuation, property value, renovation
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