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Your Money > Mortgages Articles > What negative equity...
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By Sarah Modlock
Many people agree that the housing market has had a good run and that some sort of correction was inevitable. So you could say that right now we are experiencing a shift towards more realistic property values. The only problem is that if you have taken out a big mortgage and bought at the top of the market, the ugly spectre of negative equity - where your mortgage debt is higher than your property value - could be looming. The Nationwide reported the biggest annual drop in house prices since it began its property survey in 1991. The 8.1% annual decline came after house prices dropped by 1.7% in July, the ninth month in a row that prices have fallen, the building society said. This means that the average home now costs £169,316 which is nearly £15,000 cheaper than in the same month last year. "The weakening economy and poor housing market sentiment do not suggest that the market will recover quickly," said Fionnuala Earley, Nationwide 's chief economist. Property market analyst Hometrack said that prices fell for the 10th month running in July with the average home losing 1.2% of its value during July and now worth 4.4% less than a year ago. Estate agent fees up The figures come shortly after the Bank of England said that the number of new mortgages approved for house purchases in June was at its lowest level since 1999. The number of home loans approved in June fell to 36,000, down from 41,000 in May, the Bank said. Now it seems that many large estate agents are raising their prices to boost earnings during the slump. London-based estate agency Kinleigh Folkard & Hayward has raised its average fee to 2%. An increase of 0.5% to 2% in the estate agent's fee on the sale of the £228,000 average price of a detached home would leave the seller paying costs of £4,560, up by £1,140. "Consumers should not be forced to pay more to sell their home just because transaction numbers have fallen," said Mark McLaren, principal public affairs officer at Which? "We have long been worried about unfair terms in estate agent contracts. In the property downturn, consumers need to be on their guard, read the draft contract carefully, and make sure they fully understand its implications, especially regarding what fees may become due, and when." The Bank of England noted the trend in rising estate agents' fees last week, warning in its regional trends survey that prices were rising across the country. Hometrack said the number of new buyers on estate agents' books had fallen by more than 6% this month. Sellers now get just 90% of the asking price, the lowest level since the survey began in 2001, and on average a property will spend almost twice as long on the market today as it did last summer. Negative equity danger The Nationwide figures show that the average price of a UK home has fallen £17,000, or 9%, since their peak of last October. This means that anyone who took out a 90% loan-to-value mortgage last autumn will now have almost all of the equity they put in. A report by credit ratings agency Standard & Poor's warns that as many as 1.7 million people could be pushed into negative equity in the next year if house prices keep falling at their current rate. If house prices fall by a further 17% in the coming year it means 14% of all mortgage holders in the UK would find their homes were worth less than their mortgages. The agency believes the sort of borrowers who are most at risk are those who have borrowed to become landlords in the buy-to-let market, or who were sub-prime borrowers, who have poor or non-existent credit histories. But the risk is also high for anyone who took out a mortgage worth 100% or more of their property's value just before the credit crunch took hold. As mortgage sales peaked it was not unusual to find offers of 125% of loan to value or five times a salary. Of course if you carry on making repayments then your home is not at risk but the losers will be those in negative equity, who can no longer afford their mortgage and need to sell. What negative equity means for you In simple terms, you won't be able to sell your property unless you plan to down-size. You also won't be able to get another mortgage with a different lender as you won't be able to repay the money you owe to the existing one. To make matters worse, being stuck with your lender could mean you are only offered higher rates or given the option of the standard variable rate. This is usually the most expensive rate to be on - an average rate of 7.24% will cost £1,083 on a £150,000 mortgage. The added pressure for many will be increased bills for just about everything else, including fuel, petrol and food. And the risk of job loss will also be a worry. If money is tight and you approach your lender for a payment holiday it may be less willing if your home is loan is huge in relation to your property. What you can do
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