The Dread of Negative Equity

by Mark Johnston

Average house prices have fallen by 1.7% in the past year according to land registry figures. Capital Economics predicts house prices will be 5% lower in December 2011 than in December 2010 and will fall a further 7% through out 2012.  

According to recent research published by the Council of Mortgage Lenders (CML) at least a quarter of those with mortgages originated since around 2005 have less than 10% equity in their homes.

The year a mortgage was taken out has a dramatic impact on the incidence of negative equity, almost half of negative equity cases are on loans taken out in 2007,when house prices were at their peaks and lending conditions were at there most competitive.

Other research has shown that an estimated 326,000 or 39% of the current 826,000 negative equity cases are first time buyers.

First time buyers are vulnerable to experiencing negative equity during a period of softer house prices. The problem is worse in those areas where prices have fallen the most in the past few years such as; Yorkshire Humberside and the north east of England.

In the current cycle, low interest rates and a relatively stable employment market are providing more options for borrowers and lenders in difficulty; Paul Smee, said.

Housing equity; a market update, a report from the Council of Mortgage Lenders (CML) says that14% of outstanding loans taken over the past six years are in negative equity. However it also showed that 25% of loans from around this time have equity of between 10-30% and almost half have equity of in excess of 30%.

John Charcol analysis revealed around two million home owners are suffering from negative equity or with equity of less than10%,

If someone finds themselves in negative equity and have money in a savings account this could be used to pay off part of the mortgage not covered at the moment by the value of the property.

Lloyds TSB banking group has launched a mortgage deal aimed at home owners trapped in negative equity but who would like to move. The equity support scheme is now open to existing borrowers with Lloyds, Halifax or Cheltenham and Gloucester; this is approximately 3 million mortgages in total.

The scheme allows borrowers to move to a property of the same value, a bigger house or downsize without increasing their existing level of borrowing by using any money they have saved as a deposit for the new property rather than using it to pay their negative equity gap.

David Hollingworth at mortgage brokers London and Country said; “The product enables a move, though its important to point out it still requires a commitment of further funds by the borrower if trading up.”

Ray Boulger, spokesman for John Charcol said,”when most people move they rely on the equity in their property to provide the bulk of any deposit needed for their new home. Having such a large number of households that are currently unable to move is not only a serious problem for the people concerned, but also has important macro economic consequences”.

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