Negative Equity risk grows - new mortgage guarantee stats

New figures relating to the government’s mortgage guarantee scheme shows significant numbers of people taking out high loan to value mortgage products, despite a potential downturn in the market on the horizon.

Since launch, there have been 37,376 mortgage completions using the scheme representing nearly one per cent of all residential mortgage completions in the UK.

Many of the completions were for properties under the average price of a property in the UK with the majority (63 per cent) of completions being for properties worth £200,000 or less.

Karen Noye, mortgage expert at business consultancy Quilter, says: “With the housing market showing signs of an impending slowdown, with some predictions showing a potential 10% drop is on the cards, there could be severe repercussions for those who have utilised the scheme.

“Negative equity in simple terms is when the outstanding balance of a mortgage is higher than the current market value of the property. In this scenario, if the householder decided to sell their property, the proceeds would not be sufficient to repay the outstanding mortgage. This is a real possibility for those who have taken high LTV mortgages such as 95% mortgages especially if house prices drop as predicted.

“The potential fallout of negative equity can be quite significant. For homeowners, it can mean being trapped in a property, unable to move or remortgage until the housing market recovers. This can be particularly challenging for those needing to relocate for work or family reasons. Furthermore, negative equity may restrict access to the best mortgage deals when homeowners come to remortgage, as these typically require some level of home equity.

“Should a homeowner with negative equity fall into financial difficulty and be unable to keep up with their mortgage payments, selling their home will not cover the full debt, potentially leaving them still owing money to their lender even after the property sale.

“While the scheme has undoubtedly provided a lifeline to many buyers, it is important for potential new applicants to consider the risks as well as the benefits at this moment in time. As the winds of the housing market change, its essential to make informed decisions to weather any potential storm.”