"Should I sell my house and break even to save more money? I’m spending so much on interest, and because the house has lost value, I am unable to get a decent interest rate to pay off more."
- Fiona in Toowoomba, QLD
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It is important to understand why this property is losing value and also why you’re not able to get a competitive interest rate before making a decision on whether to sell/retain this property. I have based my answer on the assumption that you are referring to your primary residence, not an investment property.
First, let’s address your main reasons for selling this property.
Decrease in Property Value
Some of the contributing factors might be;
- Foreclosures/short sales in the area–This can affect property values by skewing the comparable sales in your neighbourhood down, reducing the value of your property in turn.
- Economic factors - if your neighbourhood is hit by an economic slowdown, there will be fewer jobs and fewer people will be willing to live in the area, reducing demand for properties
- Environment – if amenities are not very well maintained or limited(i.e. parks, schools, hospital, shopping centres etc). Things such as landfills, power plants if they are nearby. If the property is in an area prone to natural disasters, this could be a cause also.
- You may have paid more than the market value when this property was purchased.
- If the house is not maintained well, this can drive the price down
Some of these contributing factors can be temporary but some more permanent. Economic and environmental factors are areas you will not have control over. They will also have a more medium to long term effect on prices. However, if it is due to something more short term such as lack of ongoing maintenance, these can be addressed straight away. It is important to have a clear understanding of what is causing your property to lose value. And look at avenues to remedy this issue where possible.
Right now we have record low-interest rates. Therefore, you should be able to get a very competitive interest rate in this market. If you fixed your loan before rates started decreasing, then your current interest rate might be higher in comparison. Converting a fixed loan to variable before the term ends may incur additional fees and charges. However, if switching gives you a better outcome in the long run, this might be something to consider. If you are considering refinancing
- Checking your credit report to ensure everything is in order
- Make sure you are up to date with debt repayments, utilities and other bills
- Avoid submitting multiple applications
I recommend speaking with your mortgage broker about getting a more competitive rate.
Once you have established the possible reason/reasons for declining property value and high-interest rates, it would be easier to determine whether to sell or retain this property.
After further investigations if you decide to proceed with the sale, I recommend considering;
Conduct a full analysis to determine the break-even price for your property.
As a first step reach out to a Real estate agent in your area to organise a market appraisal. They would be able to provide a sale price range for the property. This would give you a good indication of how much your property can be sold for.
Getting accurate figures on the cost base is also important.
Make sure you include all expenses.
- All fees/costs incurred when the property was originally purchased
- All fees/costs you will incur when selling the property (marketing costs/ commissions and other associated costs)
- All interest, taxes and insurance payments made since the property was initially purchased until sold
- All property improvement costs
The above exercise should give you a good indication of your break-even price, to set the most suitable price to sell.
Capital Gains Tax
Assuming this is your principal place of residence, if sold you will be eligible for the full ‘main residence exemption’ if;
- It has been your primary home for the entire period you have owned it
- Has not been used to produce assessable income -i.e. if you have not rented it out, used it to run a business or flipped it
- Is on land of two hectares or less
If the above criteria are met, you would not have to pay any capital gains tax (CGT) on sales proceeds.
Further, Your long-term goals should be considered. Is there an urgency to sell this home as soon as you can break-even? Or are you willing to retain this property if the value were to appreciate in future? Are there any changes happening in your neighbourhood that might push property prices up? These could be proposed improvements to amenities such as public transport, schools, hospitals or a new shopping complex. Your local council will have details on all proposed projects. If property prices are likely to appreciate, retaining the property until such time may give you a better outcome.
Finally, something to keep in mind is that when investing in property you are investing in a growth asset. Risk and volatility factors associated with growth assets are much higher than defensive assets such as cash or fixed interest. Therefore, if you are intending to purchase another property in future, this is something to bear in mind.
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