Mortgage industry chiefs play down fears of negative equity

Published on Saturday 16 August 2008 15:44

THE problem of negative equity for home owners is being overblown and is not an issue as long as borrowers can meet their mortgage repayments, according to the Council of Mortgage Lenders (CML).

The trade body is trying to play down claims from ratings firms, investment banks, researchers and politicians that negative equity places homeowners at risk of repossession. Negative equity occurs when the value of a property drops below the amount owed to the mortgage lender.

Standard & Poor's credit agency has estimated that around 1.7 million homeowners – one in seven – will see the value of their home fall below the outstanding balance on their mortgage in the next year.

But the CML said most estimates of negative equity are based on movements in one of the house price indices and the loan-to-value ratios of mortgages taken out before the credit crunch started. It added that nobody knows what has happened to the value of borrowers' individual properties, or whether they have made extra capital repayments. It is, therefore, impossible to know whether they are in negative equity or not.

A CML statement said: "A more worrying feature of recent reporting is the assumption some commentators are making of an automatic correlation between a borrower being in a position of negative equity and being at risk of repossession."

It explained that missed mortgage payments trigger the risk of repossession, not being in negative equity.

CML said that in the longer term house price growth and capital repayments will take home owners out of negative equity.

Recent trends in lending policy are also helping protect borrowers and lenders from exposure to negative equity. CML figures show that a year ago the average first-time buyer paid a deposit of 10% of the price of the property and this has now risen to 13%, which provides more protection if prices fall.

Negative equity is only crystallised if the borrower is forced to sell while the market is depressed.

However, other organisations have warned that it is a big threat to homeowners and earlier this year Experian, a credit ratings agency, drew up a map showing the extent of the problem across the UK.

It found Sighthill in Glasgow is one of the most high-risk areas, with average mortgage debt standing at 94.5% of the local property price.