800,000 households in negative equity


More than 800,000 households are currently in negative equity, this represents 7.3% of all homes with a mortgage and according to a new report the number could rise significantly if house prices drop further.

Negative equity happens when the loan secured on a property is greater than the value. The number of homes in negative equity has increased over recent years due to the fall in house prices combined with lenders historically offering mortgages at high loan to values, sometimes over 100% of the value of the house.

Worrying data

The new figures have been produced by mortgage administrators Homeloan Management Limited (HML) who managed mortgage accounts for 45 UK lenders totalling over £43 billion of lending. The data is based on 250,000 mortgage accounts from around the country.

Perhaps the most worrying statistic is that a further 10% fall in house prices would cause the number of homes in negative equity to double.

The data also reveals that homeowners in Northern Ireland and the North West are likely to be hardest hit.

Perhaps unsurprisingly the problem of negative equity will hit those under the age of 40 hardest; this group will include the majority of first time buyers, who tend to have smaller deposits and are therefore more vulnerable to house price falls.

HML’s chief finance officer Neil Warman said: “This analysis show just how vulnerable UK households are to a continuing fall in house prices. Since their peak before the onset of the credit crunch, house prices have fallen by nearly 18 per cent and, although there’s considerable variation in future forecasts, a number of analysts are saying we need to brace ourselves for further falls.”

Negative equity problems

Negative equity is rarely a problem if you do not plan to move house and can afford your mortgage payments.

However, with lenders asking for ever larger deposits and reserving the best deals for borrowers with a 25% deposit, negative equity can cause particular problems for those people who have to move house.

A rise in the number of homes in negative equity could also cause a blockage in the housing market as it means less properties will be put up for sale and less buyers looking to move. It can also cause issues for the movement of labour as people struggle to sell their house and move in search of work.

House price falls

The latest data from the Halifax showed that house prices fell by 2.6% year on year but stayed flat over the past three months, giving hope that the bottom of the market may have been reached. However, if prices do fall further more and more borrowers will be plunged into negative equity with serious consequences for them and the wider economy.