Negative Equity Rears Its Head
People who took out 100% plus mortgages are facing the prospect of negative equity as house prices continue to tumble. This is only a problem if they have to sell or remortgage. Lower house prices might tempt new buyers, but they now have to find deposits to fund a purchase.
The spectre of negative equity is rearing its head again in the UK. As house prices continue to sink, those people who took out large percentage mortgages on their homes in the past couple of years may now be seeing the value of their home falling lower than the amount of their mortgage.
The Council of Mortgage Lenders (CML) says that over 23,000 people took out mortgages worth 100% or more of the value of their house in the year to March. According to Nationwide the price of an average property has fallen from £177,083 in March 2007 to £173,583 last month, so those 23,000 people are likely now to have negative equity on their property.
With house prices forecast to go even lower, more people could fall into the negative equity trap.
However, as with falling share prices, you will only realise a loss if you sell your shares, or your property, or repay your mortgage. If you sit tight in your house, then its value is immaterial to you, and is only important when you come to move. You may have a problem if you need to remortgage in a state of negative equity.
Banks and building societies are no longer offering 100% or greater mortgages as the credit crisis has forced them to avoid higher risks and tighten their lending criteria.
Northern Rock was one lender which keenly lent 100% - or more - of the value of a property, and many people took advantage of such offers as the only way to land the property of their dreams.
Potential new buyers will be keen for house prices to come down further, but with 100% mortgages no longer available, they now need to save for a deposit, which takes longer. This is part of the reason why the market is stagnated and shows no signs of picking up again just yet.
