One in seven homeowners 'to fall into negative equity'

Posted on 9:16 AM by Sameer Shah

About 1.7m homeowners – or one in seven – may fall into negative equity over the next year as the UK housing market deteriorates further, a leading financial body has warned.

Such a figure would match the depths of the 1990s housing crash, which saw an unprecedented number of people in financial misery as a result of house price falls.

# Mortgage repossessions: how to hang on to your home

Negative equity is when home owners end up owning more on their mortgage than their house is worth, a situation that can cause serious problems – and ultimately repossession – if someone can no longer pay their mortgage or if they are forced to move home.

While the current house price crash is already on course to be as bad as any downturn since 1931, most experts had been relatively optimistic that the great majority of homeowners would not suffer too great a hardship.

That’s because a surprisingly small number of people have taken a mortgage worth more than 90 per cent of the value of their homes over the last year. So even if house prices fell 10 per cent, they would still avoid going into negative equity.

However, according to a report today from Standard & Poor’s, the world’s largest credit rating agency, house price falls will be so severe in the UK, that 1.7 million people will fall into negative equity.

It predicts house prices across Britain could fall as much as 26 per cent before the market bottoms out next year, which will see 14 per cent of the UK’s 11.8 million homeowners with outstanding mortgages slip into negative equity.

Currently around 70,000 are already suffering from the predicament – a far greater number that previously feared. At the start of July the research company CACI calculated that 145,000 mortgage holders were suffering from negative equity.

However, since then more evidence has emerged that the house price slump is gathering pace. House prices have fallen 9 per cent on last year, according to S&P’s estimates which are based on Nationwide and Halifax’s figures for April.

It has forecast a further 17 per cent tumble in house prices “before the trough of this cycle is reached in 2009”.

The ratings agency said that for every further percentage point drop in house prices, around 60,000 to 80,000 borrowers could enter negative equity. S&P said those at most risk were those with high loan-to-value mortgages, and in particular the “modest fraction” of borrowers who have 100pc mortgages - typically first time buyers and buy-to-let landlords.

The vast majority of the UK’s homeowners still have relatively low loan-to-value mortgages, the report said, with an overall UK average loan-to-value ratio of 54pc. However, in the buy-to-let sector, where many loans are interest-only, S&P expects one in five borrowers to fall into negative equity.

The report added: “The current run of house price declines raises the prospect of negative equity for a large number of homeowners, a situation not seen since the 1990’s house price recession.”

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