Your guide to navigating negative equity

Since the end of 2021, house prices have softened across the country. And it’s a situation that many New Zealanders haven’t experienced for many years.

If you own your home, you’re happy in it and have no plans to move, whether it’s theoretically worth a little less now than it was a few months ago probably doesn’t register as a concern.

But if you bought near the peak of the market, you may have noticed a term that has been cropping up a little bit more often in conversation lately: “negative equity”.

What does this mean?

Negative equity means you owe more than your house is worth. In other words, your mortgage is bigger than the amount you could get if you were to sell your house right now.

How likely are you to be in negative equity?

Not very. House prices increased quite a lot through 2021 in particular, that it is only a relatively small subset of recent buyers who are exposed to falling prices. Lenders have also required larger deposits in recent years, which provides another buffer.

Does it matter if you are?

Broadly, not really. It may not be a comfortable feeling but, from your lender’s perspective at least, as long as you’re paying your home loan repayments on time, that’s all that really matters.

Also, keep in mind that, until you have to sell it, your home has only really lost value on paper. You never know what a house is actually worth until you take it to market and see what buyers are willing to pay. Until then, it’s a best guess based on medians and averages.

In time, house prices will likely pick up again and you’ll pay down your home loan to the point that you build a decent amount of equity.

There were homeowners who briefly fell into negative equity after the global financial crisis, and who have since seen their places increase in value substantially.

What do you need to do if you’re in negative equity?

First up, don’t worry. Markets move in cycles, and it’s likely that this will end up being a blip in your memories of your homeownership journey.

What you can do is try and build the equity in your home faster, by paying your mortgage down as quickly as possible. This will allow you to reduce the amount you owe, and with it, the duration of your mortgage – thus reducing interest costs overall. Most lenders will allow you make a certain level of extra repayments without penalty – or you can take the opportunity when you next refix to increase your payments.  At the beginning of your loan, equity builds up slowly as you make payments but as the years go by, more of your payment goes to reducing the principal owing.

Keep in mind that it may be much harder to borrow more money if you’re in negative equity, because a lender will ask for a rundown of your assets and liabilities. That means it’s more important to pay down your debts if you can, and build up an emergency fund to call on if an unexpected expense arises.

Focus on boosting your income

People only really hit trouble with negative equity when they have to sell a property at an inopportune time. There are situations in which this might happen that could be completely out of your control – such as a need to move to look after a family member, or even a relationship breakdown. But sometimes it’s due to loss of income. Your best insurance against this is probably to make sure your income keeps coming in. If it’s possible, it might help to try to negotiate a pay rise from your employer, or think about ways to diversify your income streams as added protection.

Ignore the noise and focus on the positives

Try to focus on the good things about owning your own home. You aren’t paying rent to a landlord who could end your tenancy. You probably found a great place that might not be available if you were in the market now. You’re settled and on track. Interest rates might have risen but they move in cycles, too. And with each home loan payment you make, you build more equity.

Like to chat?

We’ve seen market cycles before and we know what it takes to ride them out. If you’re worried about your current position, or just want to talk about the next steps for the future, give us a call today. We are here to help.

Disclaimer: Please note that the content provided in this article is intended as an overview and as general information only. While care is taken to ensure accuracy and reliability, the information provided is subject to continuous change and may not reflect current developments or address your situation. Before making any decisions based on the information provided in this article, please use your discretion and seek independent guidance.