With recent housing price reductions and interest rates rising, the financial security of many homeowners is at increased risk.
This is especially true for those who borrowed against their property in the last couple of years to ride out the COVID-19 storm – something we have seen among small to medium business owners as they struggled to keep them afloat.
Property prices plummet
According to recent CoreLogic data, capital city housing markets across Australia fell as much as six per cent between July and September this year. Regional towns have also seen drops.
This is a trend the major banks predict will continue into 2023, with NAB reporting house prices are set to plummet 23 per cent in some states between 2022 and 2023.
NAB also reported that Sydney will suffer the biggest drop in housing prices this year at 12.9 per cent, set to be followed by an extra 9.4 per cent in 2023.
In addition, Westpac and Commonwealth Bank have warned Australians face an approximate fall of 18 per cent in Melbourne and Sydney by the end of next year.
RBA’s interest rate war
The housing price reductions are down to the Reserve Bank of Australia’s (RBA) ongoing interest rate rises to curb inflation and bring consumer prices back on par.
As of November 1, the RBA raised its cash rate by 25bps to 2.85 per cent – its highest level in nine years. This is a significant increase from the 0.10 per cent we saw in April.
While they have good economic intentions, cash rate rises can create problems for homeowners.
The monthly repayment struggle
For those with variable mortgages, the RBA’s cash rate rises are increasing monthly repayments and putting more people in a state of mortgage stress.
According to Roy Morgan figures, as many as 1.1 million Australians are now struggling to meet their monthly repayments.
The consequences of defaulting on your repayments could result in you being charged interest at the default rate, debt recovery and other fees, or your lender taking possession of and selling your property.
Lower prices; less equity
For homeowners, particularly those who have borrowed against their property, the housing price reductions also mean less equity.
The problem with less equity is not only a smaller financial interest in your home, but you also face being in a position where you are in breach of your bank or lender covenants and, therefore, at risk of defaulting and losing your home.
For example, a bank may have it written in your mortgage agreement that you must maintain a debt-to-equity ratio of a certain percentage. If you breach this, the bank can call in the loan – asking you to pay it in full.
The trouble with this is that the only way you can pay that debt in full may be to sell your home. However, if the value of your home has reduced to that point, you may not be able to cover the debt.
This could result in you being pursued personally and even declared bankrupt. Your lender could also call in a receiver for your business.
Business receivership or home possession
Your bank or lender can only appoint a receiver or a voluntary administrator to your business if you have taken equity from your home personally and secured it with a General Security Agreement (GSA) over your company’s assets. In this instance, they have a claim over it if you default.
They can also appoint a receiver or voluntary administrator to your business if you have taken out an equity loan on your home in your business's name and are defaulting on it.
If you haven’t taken out the equity loan in your business name or secured against it, banks don’t have that option.
Instead, they may look to take possession of your home – whether your default was due to mortgage stress, housing price reductions or both.
How to reduce your security risk
Being in negative equity doesn’t necessarily mean you’re in financial trouble. Trouble is only imminent if you can’t afford your repayments or default on a debt-to-equity clause.
So make sure you continue to meet your repayment obligations, and look at overpaying where you can to improve your ratio. You could also consider adding value to your home, such as renovating a bathroom, by utilising savings.
If you are currently struggling to meet your mortgage repayments, whether you’re in negative equity or not, you should talk to your bank or lender. Most lenders have hardship teams who can help you find a feasible solution for your situation.
You should also seek expert financial advice – catching things early can significantly mitigate or squash your financial security risk.
Are house price reductions and high-interest rates a potential threat to you? Contact our experts at Shaw Gidley today on (02) 4908 4444 or (02) 6580 0400 for free initial advice. Please be assured that all discussions are confidential.