And the misery looks set to continue. A separate report from the Bank of England, warned that UK mortgage borrowers are being drawn into a vicious circle of negative equity and higher mortgage payments. Its half-yearly Financial Stability Report said that up to 1.2 million homeowners could fall into negative equity – where the value of your home is worth less than the outstanding mortgage held against it - if house prices continue to fall.
Property values have dropped by an average of 13% from their peak in October 2007, a faster rate of decline than that seen in the United States and close to the total fall in UK house prices in the early 1990s. And the Bank of England suggested further falls are likely.
Who will be hit hardest?
Those most at risk of negative equity are people who bought their first home in recent years, as first time buyers tend to have smaller deposits, and therefore less protection against house price falls, than home movers.
A large number of landlords are also at risk because many invested in city centre apartments which have been hardest hit by the downturn in the property market. This coupled with the fact lenders are now demanding larger deposits, could make it expensive or impossible for many landlords to refinance.
In addition, anyone with a bad credit history could face difficulty remortgaging as lenders tighten criteria and pull their sub-prime mortgages.
Those borrowers in negative equity could also find themselves stuck on an expensive mortgage deal, as falling house prices are compounded with the withdrawal of competitive mortgage finance for millions of borrowers.
Credit conditions have tightened massively since mid-2007 and the Bank of England believes they will restrict further, especially for people who bought their homes with little or no deposit, and those with less-than-perfect credit histories.
Research from moneysupermarket.com revealed that the number of mortgage products shrank by 23% last week alone, and there are 87% fewer deals available now than in April 2007.
The main areas of the market that have been affected are sub-prime mortgages – loans available to those with impaired credit histories – and the high loan to value end. It is now impossible to borrow more than 100% of a property’s value and unless you have a deposit of 10% or more you will find it very difficult to get a mortgage. Many lenders are restricting their best rates to those with at least 25% equity to put down.
Some borrowers will find that their only choice will be to revert to their current lender’s standard variable rate (SVR) until another lender is willing to offer them a deal. In that case, they are likely to face a mortgage payment jump of up to two percentage points.
Louise Cuming, head of mortgage services at moneysupermarket.com, said: "Last week was a grim one in the mortgage market with the number of deals available falling 23% from 4,930 to just 3,785. Since April 2007 the number of mortgage products on offer has now fallen by 86%. Most of the products that were scrapped last week were sub-prime, highlighting the disappearing options for these borrowers."
Some borrowers will therefore find that their only choice is to stick with their current lender and wait for market conditions to improve. And this will more than likely mean a big jump in their monthly repayments.
What should you do?
Unfortunately there is little some borrowers can do as the current state of the market means they won’t be able to switch onto a new mortgage when their current deal ends. This does not mean they are completely stuck as their current mortgage won’t be withdrawn but once the fixed or discounted term ends they will move onto a higher rate – probably their lender’s standard variable rate (SVR), which is probably around two percentage points higher than the rate they’ve been paying for the last few years.
Someone with a £150,000 repayment mortgage coming off a rate of 5%, would see their monthly payments leap from £877 to £1,060 if they moved on to an SVR of 7.0%.
As long as the payments are affordable this shouldn’t be a huge problem and homeowners can just hold tight until the mortgage market opens up again or house prices recover. The problem comes for those who can’t afford their mortgage payments. However, there are also steps you can take to reduce the risk of finding yourself unable to remortgage and potentially struggling to meet your mortgage payments each month.
- If you are in negative equity it is likely to be some time until available finance is open to you and you should speak to your existing lender immediately if you are worried about maintaining your mortgage payments. They will try to come up with a suitable and temporary payment plan.
- If you can afford it and your mortgage allows, it is a good idea to make overpayments, whether or not you are currently in negative equity. This will help to pay down your mortgage debt and reduce your LTV ratio, hopefully making a wider range of deals available to you in the future.
- You could also consider home improvements, both to increase the value of your property or to increase your living space if you are currently unable to move. Of course, you will need to think carefully about how to fund any projects as lenders are not currently willing to make further advances for home improvements unless you have significant equity in your property.