A few years ago the thought of negative equity seemed absurd. But it’s now a real problem for increasing numbers of people. Unfortunately, there are no easy solutions.
A few years ago when we started fretting about the risks of negative equity in MoneyWeek, we looked absurd. With house prices rising by thousands of pounds a month, having a debt greater than the current value of the house bought with it seemed utterly impossible to most people. Not any more.
According to credit agency Experian, a good 8,000 people are already in negative equity and, say analysts at Morgan Stanley, by the end of next year they are likely to be joined by another million or so mortgage holders (assuming a 15% fall in house prices).
Note that in some areas of Glasgow, Manchester, and even London, the average mortgage already equals over 90% of the average house price. This is clearly not a good thing, particularly given that even the IMF is now forecasting a “sharp deterioration in house prices” across the UK.
So what do you do if you are either in, or at risk of, negative equity? Well, you don’t actually have to do anything. If you can afford your mortgage payments and you like where you live, you can just sit the whole thing out – as many people did in the early 1990s. Property cycles come and go and at some point prices, in nominal terms at least, will rise. And anyone with a repayment mortgage will be cutting their debt levels over time anyway: someone with a 25-year repayment mortgage at 5% will pay back 4% of their loan over the first two years, Ray Boulgar of John Charcol told The Daily Telegraph.
The problems come if you need to remortgage. With most lenders now requiring you to have substantial equity before they even let you sit down to fill in a mortgage application form, no one in negative equity has much of a hope of getting a new deal from anyone
The result? They’ll end up stuck on their current lender’s standard variable rate (SVR). These currently average 7.24% on the high street. Those who need to move house are in trouble too: if you can’t pay off your debt you can’t sell your house, and you certainly can’t take out another mortgage.
The solution? There isn’t one. You can’t walk away from your debt. Your lender can pursue you for it for 12 years and defaulting on payments will wreck your credit rating for ever anyway. You’ll also be homeless. The truth is that the only realistic path open to those in negative equity is to repay as much of their mortgage as possible, as fast as possible.
That means swapping interest-only mortgages for repayment mortgages and pouring any other savings into cutting the debt as well: there is, after all, no point in having savings earning 6% (taxable) in a savings account if the result is that you have to pay 7% plus on your mortgage. It’s all depressing stuff, but bursting bubbles rarely offer happy endings.