To Combat Negative Equity

Posted on 2:30 PM | By Smart Wealth Advisory | In

Negative Equity happens when the value of an asset falls below the outstanding balance on the loan used to purchase that asset. Negative equity is calculated simply by taking the value of the asset and minus the balance on the outstanding loan.

Negative equity often occurs when a homeowner purchases a house using a mortgage and then the economy starts to slow or home prices start to drop. After the house purchase, the value of the home decreases below the value of the amount owed on the mortgage, causing negative equity.
Negative equity is the term commonly used to describe the situation of having a home that is worth less than your mortgage. There is no easy solution to the problem of negative equity. You may want a bigger house or need to move to a different area for employment reasons.

There are a number of things you can do when you're handling Negative Equity:

1. Ask your home loan consultant
And/or broker if they have a plan that can combat Negative Equity. Be aware that sometimes, you may have to pay off the old mortgage debt over a shorter time period than a usual mortgage, such as 10 years rather than 25 years. So make sure it's the right choice for you. Basically, this option adds to your mortgages with lower time and higher interest rates.

2. Guarantor on a new loan
Some financial institutions may ask for a guarantor for a new home loan. You have to be very careful here - You're putting someone's finances on the line.

3. Pay less than full amount
Some financial institutions may agree to accept payments on shortfall debt by securing part of the debt on a new property as part of your mortgage and writing off the rest.

4. Obtain unsecured loan
Depending on your definition of unsecured loan, this could mean borrowing from illegal money lenders, or legal money lenders that have scammy schemes. This will probably be more expensive than a secured loan because a higher rate of interest is usually charged, but an unsecured loan does not put your new house at risk. The loan may also be over a shorter period which would mean the monthly payments are likely to be larger.

5. Renting Out your Home
Renting your old Malaysian property is the best way to cover the costs and stretch your budget a little wider. Beware of renting out your home - Some financial institutions may increase your home loan or mortgage's interest rate when you rent out. You will still be liable for housing repairs and mortgages.

6. Selling your Home
Selling your home could mean a fast and quick effect, but it's not all so simple. Read MHL's How do I price my home for sale and Manage and Save Money - Malaysia Mortgage. Take note that you need permission from your financial institution, and also persuade them to obtain the best price for the Malaysian property you're holding.

7. Borrow money - the amount needed to clear the shortfall from another source such as a personal loan, savings or from a friend/relative.

8. If you have an endowment mortgage you could check with an independent financial adviser to see if the value of the endowment could be off-set against the negative equity.

9. If you have the means, payments on an endowment policy or other investment scheme could be increased to build up enough cover to pay off the negative equity when the house is sold. You could check the surrender terms of any investments you already have. Have any policy valued both by the insurance company and second hand policy brokers.

10. If you have an endowment mortgage it may be worth discussing with your lender the implications of swapping to a repayment mortgage. The advantage of doing this is that with a repayment mortgage you would be paying part capital and part interest every month. This would mean you actually reduce the balance you owe on the mortgage over time and therefore reduce your negative equity.


Be very careful to get independent financial advice when considering changing from an endowment to a repayment mortgage. You may lose out on payments you have made on your endowment if you surrender the policy early on, as it may not be worth as much as you have paid in.

* It is also possible with a repayment mortgage to make extra lump sum payments off the mortgage which reduce the balance owing. You have to be careful that the lender accepts the payments off the capital balance and not just as advance payments off your monthly installments.

* If you want to move because you need more space, look at whether you can convert your loft or build an extension. In this way you may be able to stay in your home until house prices improve.

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