A collaboration between HHG Legal Group’s Family & De Facto, Property and Wills & Estate Planning teams, Matthew Lilly, Sue Holgate and Lucy Ferreira explores the prevalence of negative equity and the effects it could have on legal proceedings.
On 3 June 2020, the Federal Government announced that Australia has hit its first recession in 29 years. The GDP dropped 0.3 percent in March amid ongoing bushfires and the beginning stages of the COVID-19 pandemic. With the unemployment rate jumping to 6.2% and many predicting it could go high as 10%, many households are already struggling and watching their most significant asset’s value diminish before their eyes
WHAT IS NEGATIVE EQUITY
Negative equity is when the market value of the property has fallen since the property was purchased, and the mortgage is now more than what you can sell your property for. The remaining sum on the mortgage after the sale of the property will need to be paid off. The RBA released figures in 2019, stating around 2.75% of securitised loans by value were in negative equity, with the highest rates in Western Australia and the Northern Territory. These two states alone accounted for almost 60% of these negative equity loans. The most recent data from CoreLogic’s Home Value Index has WA is tracking at -2.12% for the year with a devaluation of 0.56% between 30 April and 31 May 2020.
Consistent house pricing falls in recent years, coupled with what many view as an oncoming unemployment spike, when Job Keeper subsidies are removed, people are concerned there may be a correlated spike in mortgage stress in the coming months when mortgage repayment holidays are over. For those looking to alleviate this stress by selling their home, negative equity may pose unforeseen complications.
It is important to work out whether or not you need to sell the property right now. Is the market expected to fall further in the coming years, resulting in an even bigger gap between the value of your property and the amount you owe on your mortgage? Or might you be better off simply holding onto your property and waiting for the housing market to recover?
The downturn in the mining sector over the last couple of years saw many WA residents without jobs and struggling to pay their mortgage, combined with the COVID-19 pandemic, which has resulted in the demise of the retail, hospitality, tourism, and events sectors, which employs just under 20% of the population
How to sell a mortgaged house at a loss
The full amount of the mortgage will need to be paid on the sale of your property, including the shortfall. In this circumstance, you will need to obtain approval from your bank.
If you sell your home for less than the balance owing on your mortgage, the bank will want to make arrangements to ensure they are paid the shortfall.
The Bank may enquire whether:
- If you have savings to cover the shortfall.
- If you have other assets that can be sold.
- The sale of the property was an “arms-length” transaction, conducted by a licensed real estate agent and does not involve a related party sale.
- If there is mortgage insurance, the bank may make an application for the insurer to cover the shortfall.
- If the mortgage insurer approves the sale the settlement can proceed and the mortgage insurer will cover the shortfall and pay the bank the remaining amount on the mortgage.
- The mortgage insurer will then seek to enter into an arrangement to recover the funds from the borrower.
HOW CAN NEGATIVE EQUITY EFFECT LEGAL PROCEEDINGS?
Family Law Proceedings
This situation can be especially difficult for parties who are separating. Often there are no other assets and/or savings to cover the shortfall. The separation itself is a very emotional time, often parties cannot communicate effectively. However, many decisions need to be made on what is the best course of action when there is no equity in the home.
If you have a Binding Financial Agreement in place you also need to consider if there now is negative equity in the asset distribution and whether an agreed asset allocation is deemed fair should it be affected by negative equity.
Being the beneficiary of real estate is one thing, but you also inherit the outstanding mortgage as well. With the first priority being funeral arrangements, settling debts of the deceased is often an afterthought. As often happens, your sole income alone is often not enough to pay the home loan.
Many people in this situation have no option but to sell the property to pay out the existing mortgage, specifically when the lender calls in the loan and assesses your ability to make the mortgage repayments.
However, many people want to stay in their property at all costs, especially if it is the family home. This can cause many to fall into arrears, making it difficult to then refinance your home loan, so that you can continue paying your mortgage.
If you have divided up your assets based on their value and bequests, include real estate to ensure an equal distribution to your beneficiaries. If the market value of one property has fallen since the property was purchased, and the mortgage is now more than what the beneficiary can sell the property for, this now unequal distribution of the estate may cause family conflict that raises questions of fairness and favourites.
This may be a potential driver for a Will dispute, thus increasing a potential claimant’s (usually adult children) motivation to make an inheritance claim.
How HHG Legal Group can assist :
HHG Legal Group has been assisting WA families, businesses and individuals for over 100 years. As a full service, medium-sized firm, we are able to assemble a team across all our service areas, to ensure you receive practical and holistic legal advice and representation.
Whether you need legal advice around selling a property suffering negative equity or you need to discuss the implications of negative equity on your divorce settlement, the beneficiary entitlement of an estate or a binding financial agreement, our lawyers are on hand to assist.
Get in touch via our online form or call +61 8 9 322 1966.