Until recently, it was just mining town properties declining in value and selling for less than their respective mortgages.
But with the oversupply of new apartments, tougher lending criteria, rising interest rates for investment loans, and flat wage growth – nearly all rental or investment property owners are feeling the pinch.
If you do own an investment property worth less than the mortgage, holding onto it can be challenging and there can even be a risk of bankruptcy.
A previous article looked at how to deal with a mortgage shortfall in an Australian mining town property. Since then, we’ve helped people with investment properties in the Queensland towns of Gladstone, Mackay, Moranbah, Dysart, and Rockhampton – as well as interstate.
These examples are relevant for all investment property owners with negative equity. We’ve made it simple and boiled it down to three major steps you can take to protect yourself from bankruptcy.
Before we get to the steps, remember…
Many people now have a property worth less than the mortgage…
Don’t blame yourself for the position you’re in. Thousands of people are in a similar situation. Property has always been considered a safe investment but recent factors have changed the landscape slightly.
Your bank will be well aware of the issues you face and will be having similar conversations with many other borrowers.
While banks want to recover their loans, they don’t want to lose a customer to bankruptcy. With average creditor returns in bankruptcy between 1 and 4 cents per dollar, they know they’re likely to receive little with such an outcome.
The following process focuses on better outcomes for both you and your bank, if you have a property worth less than the mortgage.
It is designed to reduce the stress with a rational series of steps that are simple to follow.
Step 1: Deciding whether to sell
1. Work out your property holding costs and how long you can afford to continue paying them. Can you afford to continue paying them?
2. Research the chances that the respective property market will improve. Will it improve?
3. Decide whether you will make your money back and whether you can hold the property until then. Can you make your money back?
If the answer is no to any of these questions, you should sell.
Unless the market is on the up, selling sooner means less money is wasted on interest and other property holding costs, and increases your prospects of avoiding bankruptcy.
It’s worth noting that many people would keep paying their mortgage if it was reduced to the value of the property. Sharing the loss with your bank for longer-term benefit for both of you certainly seems pragmatic. However, banks are generally not willing or able to agree to such a proposal: it’s still worth having the discussion but it’s unlikely to result in the outcome you’re after.
At this stage, it’s also worth investigating what bankruptcy may mean for you – for many, there’s no financial cost and its consequences are limited; so knowing what bankruptcy would cost you allows you to compare your options, and it may actually be the bestoption.
Step 2: Arranging the sale
Some clients feel comfortable managing the sale of their property themselves; if not there are professionals (including us!) who can assist with the process.
1. Speak to your bank to let them know the financial position of your property and your intention to sell. While you can hand back the keys for your bank to undertake the sale, they will appreciate you managing the process to keep costs down. This may help you later.
2. Selling the property may take some time. It will involve appointing and liaising with a real estate agent and updating your bank on the sale process.
3. At this time, you should also consider whether you can continue meeting the mortgage payments. If you can’t, discuss with your bank the hardship options they have available.
4. Offers received will need to be referred to the bank. While they may not necessarily approve you accepting an offer, they will advise if they have any objection to offers.
5. Once an acceptable offer is received and a sale contract signed, provide a copy to your bank and consider engaging a conveyancing lawyer in preparation for settlement. Either you or your lawyer should engage early with the bank to ensure they will provide a mortgage discharge form to the purchaser at settlement.
Step 3: Dealing with the shortfall
Generally, only once the mortgage shortfall (residual debt) owed to the bank or mortgage insurer is crystallised (becomes certain), negotiations with the bank to avoid bankruptcy can commence.
This is where we can provide the most value for you, by:
1. Assisting you to formulate a proposal to settle the bank’s debt (as well as any others). We also prepare a detailed assessment of your assets and liabilities and other information to help the bank properly assess your offer.
2. Negotiating further with the bank and other creditors as necessary with the aim of avoiding a debt agreement or bankruptcy.
Any arrangements agreed then need to be properly documented before you hand over any money. Such arrangements will provide for full and final settlement of the bank’s debt so they have no further claim against you.
Recent success story
We recently helped a client with negative equity properties avoid bankruptcy and settle mortgage shortfall debts totalling more than $1 million (across a number of properties) for less than $100,000.
The settlement amount was payable in instalments over two years. It represented not only the best deal for the individual concerned but the best outcome for the bank (certainly much better than bankruptcy).
We can’t guarantee that a settlement arrangement will be agreed in every case, though we have had many successful outcomes like the one above.
If you’re stressing over the value of your investment property, get in touch on 1300 906 966 or chat to us via the live chat window on our site.