"If a borrower in negative equity absolutely needs to sell, they are not necessarily ‘trapped’ – a word often overused in this context."
No mortgage borrower wants to find themselves in negative equity, with the amount they owe their lender exceeding the value of their property. But negative equity is not quite the death knell some market commentors make out. Critics – particularly in the national press – have been quick to voice their concerns about the risk of first-time buyers being ‘trapped’ in negative equity by higher LTV products, particularly regarding the Chancellor’s mooted 99% LTV scheme. Of course that did not come to pass, but the recent rise in 95%-plus LTV mortgage offerings from lenders has sparked similar panic-mongering.
As we all know, higher LTV mortgages do come with their own issues. Lenders charge for risk, so they are by necessity priced at higher interest rates than lower LTV deals, which impacts their affordability, limiting the number of borrowers who qualify. But the potential for landing first-time buyers in short-term negative equity need not be the primary focus when it comes to higher LTV homeloans, at least not from the borrowers’ perspective (lenders themselves have different and varying concerns, but that is another article). It might be helpful to examine the impact negative equity is really likely to have on today’s homebuyers.
Passing problem
The first point to make, and perhaps an obvious one, is that if all other factors remain constant, negative equity itself is not a problem for the borrower. If a borrower sees the value of their home fall below the size of their loan, it makes no material difference to their finances as long as their income remains constant and they continue to live in the property. They simply need to remain in the same home until property prices pick up again.
For most people, the wait should not be a huge challenge. There is no definitive data on how often people move house in the UK, but estimates suggest we tend to only move three to four times in our lives. Research carried out by Savills in 2021 found that those who sold their home had owned it for 14 years on average.
Negative equity only becomes an issue if a borrower is forced to sell their property, which might happen due to redundancy or divorce impacting their financial situation, or because they need to relocate for work or to be closer to family/elderly parents, for example. Of course, they may have the choice of renting out their existing home and renting themselves for a period, but options do exist for those who want to sell up and buy another property, even if they are in negative equity.
Lenders will help
If a borrower in negative equity absolutely needs to sell, they are not necessarily ‘trapped’ – a word often overused in this context. They won’t have the freedom of remortgaging onto the best deal from the whole market, but their own lender may well facilitate a necessary move.
Some providers have mortgage schemes specifically designed for customers in negative equity, which may allow borrowing of up to 125% of the current property’s value to fund a move, for instance.
Some may agree to accept less than the full amount of the shortfall by securing part of the debt on a new property as part of the new mortgage, and writing off the rest. Lenders actively seek to be supportive to existing customers in challenging circumstances, and borrowers in negative equity should be advised to speak to their lender as early as possible to discuss their options.
Degree of downturn
Admittedly a limited, short-term drop in property values would have a more manageable impact on higher LTV mortgage borrowers’ potential journey into and out of negative equity than a dramatic downturn or all-out crash. The latter looks highly unlikely in the current market. Most forecasters predict that average UK house prices will fall between 1% and 3.5% this year, before picking up gently in 2025. So if this year’s first-time buyers should dip into negative equity territory, they should not stay there for too long. Ironically, it is this very house price resilience that makes higher LTV mortgages a necessity in the first place, and only a long-term plan for building affordable housing on a major scale is likely to improve the property landscape for all.
