Negative equity is back!

by Mark Johnston

Figures from the land registry show that sales of homes have plunged by up to 20% over the past year.

House prices are plunging at a rapid rate across Britain and as a result many face the financial heartache of being ‘trapped’ on expensive mortgage rates in their homes.

Despite these plunges many sellers are still in denial that prices are actually falling so rapidly and the average asking price for houses stand at £233,139. These prices show a fall of just 8% when in actual fact selling prices are 11% lower.

According to the council of mortgage lenders (CML) 7% of mortgages, 827, 000 home owners are already in negative equity. The worst affected are those in the north. In areas where house prices are falling more rapidly, the difference between seller’s expectations and the actual prices homes are selling for is even more dramatic.

Some data has shown that in just 4 years tens of thousands of pounds has been wiped off the value of peoples homes.

Most people who have already fallen in to negative equity bought their properties at the peak of the property market boom between 2000 and 2007.

Negative equity only really becomes apparent and a problem when you need to move, re-mortgage or want to switch to a better deal. Then the problem moves from being ‘on paper’ to reality.

Negative equity is simply when the mortgage on a property is worth more than the actual property. This can be a very uncomfortable position to be in; however it need not be devastating.

The worst affected by negative equity are first time buyers who were previously not required to put up a deposit to secure their mortgage and in fact some even took on loans that were up to 25% greater than their property’s value at the time. Many of these first time buyers also took out interest only deals which meant only the interest on the mortgage was being paid and none of the capital.

The credit crunch in 2008 put an immediate end to the days of cheap and quick mortgages. Once the credit crunch and recession really hit banks and building societies alike suddenly found that they too were unable to obtain cheap funds to use to fund mortgages and therefore they clamped down harshly on who they lent money to.

Some home owners are now stuck in properties that are far too small for their growing families; others are desperate to move for a new job.

The social cost of being in this position is now huge especially at a time of such high unemployment. The bank of England has even reported concerns from businesses who are now really struggling to recruit new employees as they are unable to move to where the work is.

Once borrowers find themselves in negative equity it is always wise to start acting on sorting it out straight away and not just sitting back waiting and hoping that house prices will rise.

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