A quarter of homeowners and half of all buy-to-let investors could be thrust into negative equity this year, the City regulator is warning.
House prices have been in freefall since they peaked in late 2007, and many analysts believe average home will cost 30% less than this by year end.
If this proves accurate, the Financial Services Authority says a staggering two million homeowners and 500,000 buy-to-let investors will owe more money than their homes are worth.
Negative equity doesn’t mean repossession
Of course, just because someone is in negative equity doesn’t mean they are about to lose their home.
The Council of Mortgage Lenders (CML) estimates that around 75,000 homes will be repossessed this year – less than 4% of all the households in negative equity.
Owing more than a property is worth is only a problem if the property needs to be sold or the homeowners are struggling to make repayments.
However, the FSA points out that the burgeoning number of households in negative equity will have wider repercussions for the economy, as this group will look to curb spending and are less likely to move, resulting in lower economic activity.
Help for cash-strapped homeowners
If you are currently struggling to meet mortgage repayments in these difficult times, then you need to act quickly to get your finances back under control.
The CML, along with debt charities Citizen’s Advice and Shelter, has compiled a list of things you can do to overcome your mortgage woes.
What not to do
- Don't ignore your debt problems: this will only make them bigger.
- Don't stop paying your mortgage altogether. Continuing to pay what you can on a regular basis will help you reach an agreement with your lender. This is also an entry requirement for some of the government support schemes.
- Don't send the keys back and walk away: you are still responsible for the debt on the property.
- Don't enter a sale and leaseback scheme without advice: if it seems too good to be true it probably is. These schemes can be misleading and are not yet regulated.
Getting out of trouble
- Contact your lender, the earlier the better. Your lender will work with you to try and find a repayment solution. Your lender may be able to: lengthen the mortgage term, add your arrears to the outstanding debt, switch to an interest only basis, temporarily reduce your payments, or change the method and date of payment.
- Get free, independent debt advice: Such organisations can help you manage your debts, talk to your lender, and offer advice on the new government assistance schemes.
- Check if you are eligible for assistance. Are your payments covered by an insurance policy? Are you eligible for help towards the mortgage through the benefits system? You may be eligible for one of the government assistance schemes: check with a free and impartial debt adviser.
- Attend court: borrowers who attend possession proceedings are more likely to reach an agreement to stay in their homes. Remember, the court is independent to make sure a fair decision is reached.
How to stay out of trouble
- Overpay if you can afford it: if you are benefiting from lower mortgage rates, you could consider overpaying each month, though it may make sense to pay off any more expensive debts first. This will improve your equity position, reduce your interest payments and can shorten the length of your mortgage. But overpaying one month doesn't mean that a payment can be missed the next.
- Switch to a repayment mortgage: use this period of low interest rates to switch to a repayment mortgage and start to pay down your loan. Remember to check if there are any charges that may be associated with this first.
- Prioritise your debts: if you don't pay your mortgage you risk losing your home, so pay your mortgage and utility bills before unsecured debts like your credit card.
