One in 10 Homeowners Hit By Negative Equity

A ratings agency has revealed that negative equity figures have reached an all time high this month, displaying that one in six prime mortgages in the UK is now affected by negative equity.

Presently one in ten homeowners with otherwise clean credit records has a mortgage worth more than the value of their homes. Startling statistics show that these figures will shoot up to 34% by 2010, if house prices continue to drop.

As a result, brokers have been warned that clients in negative equity may need alternative debts solutions as other options such as selling up, equity release or remortgaging will not be available to them.

Ketan Thaker, Director at the rating agency said: "While prime borrowers are unlikely to default solely because the value of their house is less than the outstanding balance of their mortgage, [we] expect default rates to be higher for borrowers in negative equity."

She also said: "Borrowers with equity in the property have options available to them in case of financial distress that borrowers in negative equity do not, for example sale of property, remortgaging, better availability and pricing of products, and the withdrawal of equity to fund temporary cash shortage, which could help avoid foreclosure."

Debt management could be the solution

Therefore, clients who are suffering from negative equity or struggling to keep up with their finances could find debt management solutions, by signing up for a debt help plan, or an IVA.

Nick Hopkinson, the director of Property Portfolio Rescue (PPR), said: "Today's report should act as a wakeup call around one third of all UK mortgages are likely to be in negative equity by next year. Anyone worried about their job or ability to continue paying their mortgage in the near future should be acting now, getting specialist debt or mortgage advice before it's too late."

He added: "Many homeowners are sleep walking into a nightmare combination of reduced household income, negative equity and higher mortgage costs."

Homeowners in the East Midlands are most at risk of facing negative equity, whilst customers of nationalised lender Northern Rock have also been badly affected, with 32% of loans in its specialist Granite mortgage division being hit by negative equity.

Northampton, Nottingham and Derby are the worst affected cities. The analysis shows that the East Midlands have the highest rate of loans in negative equity (21.8% by value and 15.1% by number of borrowers) and Scotland has the lowest (5.4% by value and 3.6% by number of borrowers).

Alastair Bigley, Head of the financial group stated: "Amongst the loans in our analysis, which constitute nearly 25% of all outstanding UK prime mortgages, approximately 270,000 borrowers are in negative equity."

He added: "Of the 2.7 million prime mortgage loans totalling £263bn securitised through RMBS, more than £39bn of loans are in negative equity and this figure will rise further as house prices continue to fall."

No end in sight

Mr Hopkins ended on a sour note: "Unemployment is continuing to surge and re-mortgage criteria are getting harder by the day, as shown by the virtual collapse of re-mortgage lending over the last few months. Also, inflation is still above the Government's two per cent target, which inevitably means loan costs can only increase from today's historic low," he said.