Residential property values are falling across the country and those falls will probably deepen as the year goes on. The secret to survival is building up equity in your home to ensure your mortgage is never worth more than the value of your property. It will also pay to be ahead of your home loan repayments if the Reserve Bank increases interest rates later in the year as many economists expect.

Everywhere you turn you see For Sale signs. There are 70 per cent more properties on the market today than this time last year and auction clearance rates have plunged. That’s not going to improve come Spring if we get a rate rise.

There’s no reason for alarm, you just need to proceed with caution. The Australian economy is in pretty good shape and should avoid a property market crash.  It’s very unlikely that residential property prices will drop the 30-40 per cent we saw in some parts of the US and Europe following the Global Financial Crisis. If our economic growth reaches the 4 per cent the government is forecasting and unemployment stays at a relatively low 4-5 per cent, then most mortgage holders should be in reasonable financial shape.

The Reserve Bank says it is closely watching first-home owners who bought in 2009 to take advantage of the increase in the first-home owner grant. It’s concerned some people may have overcommitted themselves to get into the market at that time and are now vulnerable to rising interest rates.

Back in late 2008 then Prime Minister Kevin Rudd boosted the first-home owners grant to $14,000 for the purchase of existing homes and to $21,000 for new homes. That spurred a flurry of home buying as people rushed to take advantage of the generous handout.

The RBA says so far first-home owners don’t seem to be struggling with home loan repayments. If interest rates increase later this year and property values continue to fall then all could change.

First homeowners in particular need to focus on building up equity in their home to ensure their loan isn’t “underwater”…meaning their loan is worth more than the value of their property. I’m assuming people who have been on the property merry-go-round for a number of years have had time to build up equity in their home, so they own more and the bank owns less.

If the bank owns more than 80 per cent of your home you need to make big changes. Adjust your lifestyle and save everything you can to bring your debt to a more manageable level. Look at your budget and work out how much extra you can put into your mortgage each month on top of your regular monthly repayments. Organise a direct debit every payday to transfer this amount from your regular transaction account to your variable mortgage account. The more you deposit the better off you will be.

Putting extra money into your variable home loan every month will reduce the length of your mortgage and the amount you end up forking out in interest over the life of the loan. It’s also great practice for managing higher monthly repayments if interest rates do rise.