Bank of England: One in ten in negative equity

Friday, 12 June 2009 11:41

The Bank of England today warned around one in ten homeowners with a mortgage are facing negative equity - or over one million households.

The central bank's Quarterly Bulletin reveals 7 per cent to 11 per cent of UK mortgage holders were in negative equity in the first quarter of the year.

However, Bank of England chief economist Spencer Dale wrote in the report: "The estimates show that the vast majority of households in our economy had substantial equity in their homes and, for the majority of households who were in negative equity, the size of that negative equity was relatively small."

The bulletin states: "Negative equity can be a painful experience for the households concerned.

"It can exacerbate households' financial difficulties in what may already be challenging times for many families. Negative equity can also have important consequences for the wider economy and the financial system."

However, the economists behind the report state negative equity in itself may not always be a problem, but difficulties increase if a financial state of a household is not strong.

It states: "Falling values of housing equity also reduce the resources that homeowners have available to draw on to sustain their spending in the event of an unexpected loss of income, eg due to redundancy.

"By itself, negative equity does not cause mortgage payment problems.

"But if a household is experiencing difficulties meeting their mortgage payments, negative equity can increase the probability of default."

It also finds those falling into negative equity are more likely to increase saving.

Sue Anderson at the Council of Mortgage Lenders (CML) explained for most people negative equity will not be a problem for most people.

"Some people affected by negative will be recent buyers who are not generally up for the next move given expensive. But negative equity does nothing for confidence and significantly lowers the number of transactions."

However, she claimed the problem of negative equity would not be as distinct as in previous house prices crashes in the 1990s.

"There was then far more transactions at the height of the market," she said explaining with high property prices putting a brake on first-time buyers making a move over this boom, fewer people would be affected than in the 1990s.

She added current low interest rates also meant those coming off fixed rate deals on to low standard variable rates (SVRs) could maintain the same level of repayments to pay back more of the capital of the mortgage.

Ms Anderson added those who were facing negative equity and trouble making mortgages repayments should seek to their lender or take independent advice.

"People should not assume there is no way forward, realistically there are things that can be done to help, such as income support on mortgage interest (ISMI) and the mortgage rescue scheme from local authorities and housing associations."

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