Prices are falling but options still open if you're moving or need a new loan

THE spectre of negative equity is once again haunting homeowners in Scotland as house prices continue to slip.

More than four in five Scottish homes bought since 2006 are now worth less than their purchase price, according to research published last week. Of 374,000 homes bought in Scotland since 2006, 306,000 are now valued below the amount paid for them, property website Zoopla estimated. The report fuelled fears that thousands of Scots could be trapped in homes they cannot sell or on mortgage deals they can't afford.

And the situation could get worse, if housing market forecasts are to be believed. Most property experts, including economists at some of the biggest lenders, expect prices to continue falling for the rest of this year, with no recovery likely until 2013.

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Not only do many of those in negative equity now seem set to stay there for a while, but their number will be swelled if prices plummet in Scotland. While parts of the country, and certain sections of the market, have proved resilient during the downturn, others have seen values fall considerably.

Homeowners who bought at the market peak are, unsurprisingly, the worst affected. More than 93 per cent of homes bought in 2007 are worth less than the purchase price, compared with just 47 per cent in 2009.

Nicholas Leeming, business development director of Zoopla.co.uk, said: "There is an unprecedented number of homeowners 'stuck' with homes they bought in recent years with the expectation that prices would continue to sky-rocket. And as a result of not wanting to take a loss on their asset, many owners have been unwilling to set realistic asking prices to sell them."

Received wisdom is that negative equity isn't an issue unless you are looking to move - but that's not strictly true. The problems for those stuck in negative equity are more likely start when they need a new mortgage deal. Remortgaging can be a "nightmare" for those in such circumstances, warned Melanie Bien, director at independent mortgage broker Private Finance.

"Most lenders have reduced the maximum loan-to-value (LTV] they will allow on remortgages, with even existing customers struggling to move on to a new fix or tracker," she said. "If you can't remortgage, you're effectively stuck with your existing lender, usually on its standard variable rate, which may be competitive or not, depending on the lender as it is set at its discretion."

The proportion of borrowers on variable rate mortgages is already at a record high, according to recent figures from the City regulator, with many borrowers taking advantage of the 0.5 per cent base rate, in place since March 2009.But when interest rates rise many of those borrowers may seek a new deal - which could be problematic if they are in negative equity.

So what should you do if you're worried about getting a new mortgage deal? If you have sufficient savings and no other debts, you could overpay on your mortgage and close the gap. If that isn't realistic, try speaking to your existing lender.

"If you're in this position with a high LTV, it's worth asking your lender whether it can offer you another deal, particularly if you would struggle to pay the mortgage on a high or unpredictable SVR," said Bien.

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Some lenders have mortgages aimed specifically at existing customers in negative equity. Halifax has a 120 per cent LTV deal at 4.74 per cent for two years for existing customers looking to remortgage, with a 999 fee. Accord and Yorkshire Building Society are among those with similar offers, said Bien. The former will lend to existing customers with an LTV over 100 per cent at 6.19 per cent fixed for two years, while Yorkshire BS will lend above 100 per cent LTV at 5.69 per cent fixed for two years, with neither charging a fee.

So its worth asking your lender what it can offer before looking elsewhere for a mortgage. For example, Northern Rock offers deals to some borrowers in negative equity, who make up an above-average proportion of its loan book because of the popularity of its 125 per cent mortgages during the housing boom. "Even if your lender doesn't list loyalty deals on its website or in its literature, it is well worth asking, particularly quoting 'treating customers fairly' and stressing your loyalty to them."

Lloyds Banking Group - which revealed last month that some 150,000 of its borrowers are in negative equity - earlier this year launched a loyalty mortgage with a difference. Aimed at "second-steppers", the Equity Support Scheme allows existing customers moving home to borrow up to 95 per cent of the value of their new home as a mortgage.

The borrower can use any savings they have for a deposit on their new home, instead of having to use them to bridge the shortfall created by the reduced house price. The catch is that the borrower is taking a loss on the first home and at risk of getting even deeper into negative equity, so its advisable to get independent advice before going down this route.

One alternative for those wanting or needing to move but trapped by falling house prices is to let out their home. Michael Maloco, partner at Maloco & Associates in Dunfermline, said: "Either stay put and wait for the upturn - it will come - or think about approaching your lender to get permission to rent. Demand in the rental sector is still making the market buoyant and the rents achievable are good. In most cases, the rental achieved is more than enough to cover mortgage costs."

Those who feel they have no choice but to sell have other options, although they are limited, said Maloco."If the need to move is prompted by financial pressures that will ultimately lead to default speak to your lender. They will very likely try to assist."

In some recent cases handled by Maloco the sale proceeds have not been enough to repay the mortgage, but the lender has discharged its security and taken an unsecured loan for the remainder. "Clearly, this is down to lender discretion, personal circumstances and the level of the unsecured 'negative equity portion' left over being relatively small."