More than one in 25 mortgages are ‘underwater’, according to research from Macquarie, and it’s a major red flag that a flood of mortgage repossessions is to come.
And when that flood hits, we’ll know the property market’s hit rock bottom, warned Suburbanite principal and property economist Anna Porter.
Figures from CoreLogic show that the Australian housing downturn is slowing – but spreading.
“The Sydney and Melbourne markets have not yet bottomed out,” Porter said.
“We see them hit the bottom when the volume of repossession sales increases, which is imminent.”
Mortgages that are bigger than the falling value of the property are putting families into financial stress, particularly across Sydney and Melbourne, she added.
“Families are locked into their current position and interest rates as they can’t even refinance their loans due to loan-to-value ratios not adding up for lenders.”
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It’s left some investors with high debts: some who purchased houses and land packages in “good times” to the tune of $350,000 to $400,000 are now finding their properties are only worth $250,000 to $300,000.
“This means these mortgages are more than likely underwater as the loan value often exceeds the property value in these cases and many of the owners are at risk of sustaining a loss should they want to or need to sell,” Porter noted.
“With nothing on the horizon to increase values in these locations, property owners and investors will have a long road ahead to recoup their money.”
First-home buyers at risk
The Coalition government has promised to bring down deposits for 10,000 first-home buyers from 20 per cent to 5 per cent, but Porter warned that these buyers could be putting themselves into highly-leveraged positions by purchasing property they couldn’t afford.
“Interest rates are at the lowest they have ever been in Australia but yet people will not only have a mortgage to the bank but also a mortgage to the government,” she said.
“Whilst this will not have a major impact on the property market as the number of first-home buyers eligible for the scheme is capped, this will do no favours for the market overall.”
But property investors hoping to snap up and make a profit from houses that have been repossessed should think twice, Porter warned.
“Having been a valuer looking after mortgagee in possession portfolios for years, I believe they are terrible buys in most cases.
“The old practise of the bank managers mate buying the mortgagee sale off market for a bargain is no longer allowed and for good reason.”
3 tips to get your property above the water line
If your mortgage is at risk of being underwater, there are things you can do to get yourself out of trouble, according to Porter:
Increase the value: If you have the cash to invest in the property, do some smaller cosmetic renovations or make additions
Rebalance the loan-to-value ratio by first paying down as much extra off your home loan as you can
Consider locking down a lower fixed interest rate so more of your repayments go towards paying down the principal
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