According to analysis by Macquarie, one in 25 mortgage holders are in negative equity and in reality, the figures are even higher.

Anna Porter, Suburbanite principal, media commentator and author warns that mortgages under water is the first sign that a wave of mortgagee possessions are on the horizon.

“With one in 25 mortgage holders now under water according to the research from Macquarie this is the first sign that the property market is about to see a wave of mortgagee in possessions sales,” warns porter.

Property economist, Anna Porter, provided strategic advice to over 6 different lenders on their distressed property assets during the GFC and she cautions that these market conditions are a tell-tale sign of what is to come.

“This is also an indicator that the Sydney and Melbourne markets have not yet bottomed out,” says Porter.

“We see them hit the bottom when the volume of repossession sales increases, which is one imminent,”

“The upswing of mortgages that are higher than the property’s value puts financial stress on families, and given the current property market landscape, this again is the reality,”

“Families are locked into their current position and interest rates as they can’t even refinance their loans due to loan to value rations not adding up for lenders,” says Porter.

This is when the banks won’t allow their customers to owe more than the value of their property. Often, if a better deal comes up in rates or families want to refinance their loans, they cannot do so.

“This type of scenario is more common across Sydney and Melbourne and some outlaying regional areas than it is in the other parts of the country due to a declining market condition,” says Porter.

“Many investors have been left with debts higher than the value of the properties they purchased especially when purchasing house and land packages in the good times in locations such as Grasemere near Rockhampton for $350,000 to $400,000 but now due to declines being left with properties worth $250,000 to $300,000,” says Porter.

“This means these mortgages are more than likely under water 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,”

“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,” continues Porter.

Mortgagee in Possession sales don’t often occur in a rising market.

“The declining value of these purchases will lead directly to an upswing in mortgagee in possession sales as they don’t occur in rising markets but on the way back down,” she says.

What can home owners do to avoid drowning in their mortgage and get the value of their property above the water line?

Porter’s top tips:

  1. Increase the value by doing some smaller cosmetic renovations or adding that extra bedroom you’ve always wanted if you have spare cash.
  2. Pay down as much extra off your home loan as you can to rebalance the loan to value ratio
  3. Look at locking in a fixed interest rate at a lower amount so that more of your weekly payment goes toward the principal to allow you to pay more down quicker

Whilst the Coalition committed the government to act as a guarantor for loans to low-to-middle income earners with deposits as low as five percent, the effect may not be as well received and in-turn heighten the number of mortgagee in possession sales in years to come.

“Essentially, these first home buyers will be putting themselves into highly leveraged positions by getting into property they can’t afford,” says Porter.

“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,”

“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,” predicts Porter.

Mortgagee in possessions sales are often deemed to be a good buy but Porter also warns against investors looking down this avenue for a profit.

“Having been a valuer looking after mortgagee in possession portfolios for years, I believe they are terrible buys in most cases,” says Porter.

“You can make good money off real estate and be a good human and not profit off other people’s misfortune,” says Ms Porter.

There is extensive legislation around the duty of care for mortgagee sales that must be followed and harsh penalties for anyone who does not comply.

“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,” concludes Porter.