Why negative equity lingers on
Following the prolonged slump in property prices, many find themselves with a loan worth more than the value their home – a situation known as negative equity. So just how bad is this problem?
Negative equity has become a regional issue, most prevalent in areas severely hit by the house price crash – namely the West and East Midlands and Yorkshire and Humberside, as well as Scotland and Northern Ireland.
Yet the rest of the country hasn't escaped the problem, and even in London – where house prices have largely recovered - 51,000 households are in negative equity.
How it happened
Pre-recession, when house prices were on their upward climb and banks were generous with loans – many first-time buyers secured mortgages of 100% of their property value, even up to 125% in some cases.
However, in 2008, when the banks hit trouble and house prices started to decline, many found themselves with a shortfall between what their property was worth and the size of the mortgage they had borrowed to buy it.
For example, if a couple borrowed £150,000 to buy a house worth £150,000, only for the property to fall in value to £135,000 – they couple would be in negative equity of £15,000.
The only solution to negative equity is to chip away at the debt using savings or by cutting back to free up extra income, yet widespread pay-freezes coupled with inflation and rising household costs has made this increasingly difficult.
Fortunately the outlook is improving - the number of UK borrowers in negative equity has declined more than 100,000, or 13% in the 18 months to October 2012, according to the Council of Mortgage Lenders (CML). Yet currently standing at 700,000 households, it is evidently still a problem.
Market commentators point out that it is only an issue if homeowners want to remortgage or move house – a position many people are now likely to be in the position following their initial house purchase pre-2008.
However most are forced to sit tight until the market picks up – which the CML reports it is finally showing signs of doing. Its latest market snapshot points to a range of different indicators that show improvement. These include 2012 reporting the highest number of property transactions since the credit crunch; the biggest spike in the number of first-time buyers since pre-2008 and an increase in the availability of high loan-to-value mortgages.
Help is at hand
Yet there is clearly some way to go before negative equity ceases to plague thousands of homeowners, so what can you do if you're in trouble?
If you are struggling with mortgage payments, talk to your as soon as possible to see what they can do to help. "Quote the Financial Services Authority initiative 'treating customers fairly'," Mark Harris, chief executive of mortgage broker SPF Private Client.
"Ask whether it will offer you access to another fixed or tracker rate, particularly if you would struggle to pay your mortgage if you move onto your lender's standard variable rate.
"It is also worth talking to an independent mortgage broker as they will know what options are open to you. If you have savings, another option may be to pay down some of your mortgage debt to give you a stronger equity position, thus enabling you to remortgage."