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One third of mortgage holders face negative equity by end 2010
04 October 2009 By Cliff Taylor
Almost 200,000 households will be in negative equity by the end of next year, representing a third of all mortgages, according to new figures.
The estimates from the Economic and Social Research Institute (ESRI) will increase pressure on the government and the banks to introduce schemes to help those struggling to meet mortgage repayments due to unemployment or falling incomes.
The ESRI estimates that 116,000 households are already in negative equity, where the value of their outstanding mortgage is greater than the value of their property. These are mainly people who bought houses since 2003 with high loans compared with the value of the property.
ESRI economist David Duffy predicted that the total would rise to 196,000 by the end of next year, as house prices continued to fall. Duffy based his calculations on main mortgages and said that top-up mortgages and remortgages may mean the figure would be even higher.
More than half the borrowers in negative equity by the end of next year - more than 100,000 - will have loans which are more than 10 per cent higher than the value of their home, Duffy calculated. The majority of these will be first-time buyers.
While negative equity does not necessarily lead to mortgage default, it does increase the likelihood of default, particularly if the household is hit by a cashflow problem due to illness, unemployment or divorce.
With unemployment still rising, more households are likely to fall into arrears over the next few years. This looks set to increase pressure on the government and banks to assist borrowers who run into difficulty.
The banks have agreed not to move against any borrower in default for a minimum of six months, or 12 months in the case of the two main banks.
However, Duffy outlined other schemes which had been introduced in the US and Britain, which involved a variation of refinancing and delaying loans.
He suggested that ‘‘policies should only allow borrowers to delay, rather than avoid, repaying their mortgage in full, to avoid the moral hazard problem of assisting those who do not need it’’.
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