Solutions For Owners Who Can't Pay Their Mortgage

Solutions For Owners Who Can't Pay Their Mortgage

There are many reasons why people struggle with their loan repayments, but there is one that has impacted many property investors who have purchased property -off the plan'.

When real estate prices are declining, and economic indicators don't fill the market with confidence, it can happen that by the time the property is built, its value has decreased below the value of the loan. When this happens, it is sometimes referred to as an 'negative equity loan".

Traditional loans are paid off over a specific period, with repayments going towards interest costs, and partly towards the principal of the loan. The goal of the borrower is to get to a zero balance.

In the past it was generally accepted that property would appreciate over time, and people were sometimes encouraged to borrow on very low or non-existent deposits. However, in the post-GFC financial climate, it is more often the case that properties have decreased in value, leaving many owners with more debt than what the property is worth.

When this happens, and you are unable to sustain repayments, you have a choice of
Defaulting on the loan, with the lender taking possession of the property (and leaving a permanent blemish on your credit history), or
Selling the property and continuing to pay off the outstanding debt, or
Get creative

Option For Creative Thinkers
By making your property easier to buy it follows that you will have more prospective buyers.

Let's consider the scenario where you have purchased an apartment -off the plan' for $500,000 with 100% finance, using your existing home as security. You now find that its value has decreased and the best you could hope to sell it for is $460,000. This means that even when you sell, you will still owe your financier $40,000 plus ongoing interest, on a property that you no longer own.

There are few people who can afford to carry such a debt - one that could put their own home in jeopardy should they default.

So, for the creative alternative.

You, as the property owner, put the property on the market for $500,000 and offer to provide a loan to a new buyer. Rather than the hefty deposit they would need to put up for a traditional home loan, you ask for just $20,000 upfront, but with repayments that may be 20% higher than your mortgage payments.

This is great for the purchaser, as one of the biggest hurdles they face in a traditional real estate transaction is putting together a deposit that the banks will find acceptable. By entering into an agreement as described above, they are able to seal the transaction with a much lower deposit, and make regular payments, knowing that the price for their potential purchase is fixed for a specified period of time.

By making your property easier to buy in the meantime, your repayments have remained up to date and if structured correctly, they will result in a regular (weekly or monthly) cash flow.

As the buyer continues to repay you at a rate higher rate than your loan repayments, you will be able to pay out your loan much faster, and receive that positive cash flow once the load is closed out. Having a -lockout clause' in the agreement will prevent a prospective purchaser from refinancing before you have paid out the loan.

Also, by including an -equitable title clause' in the paperwork, the buyer has the freedom to resell the property while the your loan is still in place.

Think Before You Sell At A Loss
Should you find yourself in the position of having an upside-down-loan, its important to consider all of the options available, and not just the ones that conservative, traditional lenders lay before you.

In his just published book 'How To Buy A House For A Dollar" property investment innovator covers a range of creative real estate ownership and sales strategies, including how to deal with upside-down-loan situations.

By Rick Otton

For more information see: How To Buy a House For $1
Interview with Rick Otton
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