Dealing with negative equity
Around one in ten UK mortgage borrowers are in negative equity.
Furthermore levels of negative equity are expected to double through the year.
While in many cases the levels may be modest, the psychological effects and strains on a family can be hard, after all the hard work spent saving for a home is wiped away by the fortunes of the property market.
Daniel Barnes looks at negative equity.
Ratings agency Fitch - after looking at the data covering 2.7 million mortgages totalling £263 billion within mortgage backed security trusts - found 23 per cent of all borrowers will face some negative equity, if house prices decline in total 30 per cent from the peak of the market, as is widely expected.
The Bank of England estimates between seven per cent and 11 per cent of UK mortgage holders were in negative equity in the first quarter of the year.
Obviously those who bought closest to the peak of the market, with highest loan-to-value levels will be most at risk.
"While prime borrowers are unlikely to default solely because the value of their house is less than the outstanding balance of their mortgage, we expect default rates to be higher for borrowers in negative equity," said Ketan Thaker, director in Fitch's European retail mortgage backed securities team.
"Borrowers with equity in the property have options available to them in case of financial distress that borrowers in negative equity do not, for example sale of property, remortgaging, better availability and pricing of products, and the withdrawal of equity to fund temporary cash shortage, which could help avoid foreclosure."
He also warns those with limited equity, may well be treated as having negative equity because so few lenders are offering mortgages at high loan-to-value levels.
It is estimated 35 per cent of borrowers do not have enough equity to secure a remortgage - although many will be happy to drop onto currently low standard variable rates.
Who is at risk?
As stated, most recent buyers are at risk, but there are differences about who is at risk compared to the last downturn in the early 1990s and today.
In the 1990s it was largely younger first-time buyers who were hit by negative equity.
Today, according to research by the Council of Mortgage Lenders (CML), there is a wider spread.
Almost a quarter of borrowers now in negative equity are aged over 40.
The reason for this is down to the fact the rocketing of house prices just froze many first-time buyers out of the market. Also the heavy remortgaging pushed more homeowners closer to negative equity.
The level of average negative equity is estimated to be £6,000 for first-time buyers and £8,000 for home movers, and for two-thirds, they are less than ten per cent in negative equity.
At the end of last year it was estimated that there were three per cent of borrowers with negative equity of £28,000 for first-time buyers and £37,000 for home movers.
Negative equity overplayed?
Kate Barker, a member of Bank of England's monetary policy committee (MPC), speaking to the Treasury select committee last month, stated: "I think sometimes the issue of negative equity can be overplayed.
"Of course negative equity only really becomes a problem for individuals if they fall under some other stress, if they want to move or if they are made unemployed. Some people are otherwise able to sustain quite long periods of negative equity."
She added negative equity could create a risk for banks.
"The difficult regarding financial stability is that we start to see a lot of repossessions that weigh back on the lenders themselves," she said.
"I think today it is not such a risk as maybe I thought it was six months ago. But it is not an insignificant risk."
Across the nation
The East Midlands is suffering the highest levels of negative equity. Some 15.1 per cent in this region are suffering negative equity, according to the Fitch study.
This compares to 3.6 per cent in Scotland.
East Anglia, the North-West and Wales were also heavily hit.
In Northampton, Nottingham, Derby, Peterborough, Manchester, Cardiff and Wigan were named as the town where negative equity was highest.
Postcode areas with high levels of negative equity were also highlighted.
Some 31.2 per cent of mortgages in Birmingham's B2 area were in negative equity, 28.1 per cent in Sunderland's SR1 and 29.6 per cent in Salford's M50.
Highest amounts of negative equity were recorded in Northern Ireland where the average difference between the value of their mortgage and house or someone in negative equity was at £23,056
In London - the gap was £12,972.
These differences between regions are partly driven by the fact that house price movements have differed by region, with some seeing bigger drops than others.
Swing back?
Ms Barker said: "I don't think we are necessarily out of the woods on the housing market just because we have seen a little bit of a pick up now.
"Because we expect unemployment to continue to rise we would expect further repossessions through the rest of the year despite the very useful efforts that are being made to keep this level low and that will probably weigh on the housing market.
"It is extremely difficult to form a view of the housing market. I am rather cautious about the scale of housing market activity certainly in the next year or 18 months."
Mr Thaker sees the negative equity holding in some place for years - as house prices are only expected to show limited growth out of the crisis.
"Even if house prices exhibited a modest recovery from their lowest levels, it will take several years for borrowers to come out of negative equity," his report states.
Making overpayments to climb out of negative equity may not be an option for many recent buyers as some fixed-rate deals just may not allow them to so or because they stretched themselves so much to secure a mortgage that they have not got the ability to save or overpay.
But those who can overpay are expected to do so given the low current savings rates.
Overpayment, Fitch finds, is not a major option and will not have a "significant impact in reducing negative equity levels in the short to medium term."
Dealing with negative equity
A spokesperson for the Council of Mortgage Lenders (CML) explained those facing negative equity and trouble repaying their mortgage "should speak to their lender, especially if they are facing repayment difficulties and seek independent free debt advice.
"There is no causal link between negative equity and repossession. We estimate some 900,000 mortgages are in negative equity, but most will be fairly modest."
She added for those having to move, they should speak to their lender, which could help, depending on their financial status and credit record.
"The best advice is to sit tight and overpay on the mortgage or try to build up savings."
She added current low interest rates would help people make overpayments.
While lenders are not targeting people who are in negative, the CML representative explains people should know if there are in that situation and how much capital repayment they are making.
But the negative equity can still hit families.
The recession is seeing a large upturn in people, especially men, seeking help from therapists.
Many identify money troubles as hitting them in a negative way. Psychotherapists report people feeling cross and bitter about negative equity.
After spending years saving to buy, the falling market has meant their deposit has been wiped out.
Myfinances.co.uk looked earlier this week atways of coping with the recession.
The key lesson is to be honest with yourself if you are facing negative equity and see if it is really a problem. Facing any problem early - and knowing if there is a problem or not - can save severe pressures further down the line.
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