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Negative Equity

Even the words ‘Negative equity’ can still send a shiver down the spine of anyone who owned a house in the early 1990s.
Those two words triggered huge amounts of heartache across the country and forced thousands to lose their homes and most of their money. The scary thing right now is that they are starting to be heard again. A small but growing band of experts say that negative equity could soon be back. And if it is it will pay to be ready. This independently written negative equity survival guide aims to explain exactly what the phenomenon is, who can be affected by it, what it entails and – crucially – how to escape it. Read on to stop history repeating itself.

Know your enemy. The first way to beat negative equity is to know exactly what it is. And fortunately that’s pretty simple. It’s just the name the money world gives to the situation when your home is worth less than your mortgage. Let’s say you’ve got a £220,000 mortgage on a home worth £240,000. It means you’ve got £20,000 of equity in your home – the money you would have left over if you sold up and paid off your loan. If your home fell in value to just £220,000, equal to your mortgage, then you would have no equity. If house prices fell even more and your home was worth just £200,000 you would be in £20,000 of negative equity.

Negative Equity for First Time Buyers

The increase of first time buyers whose loans are around 100% of purchase price could find that with house prices falling this may put them at risk of negative equity.

It is estimated that between January 2006 and August 2007, 33,000 first time buyers will have taken out a mortgage of 100% or more.

Because of the rising prices property purchasers found themselves unable to get a foot on the property ladder without 100% mortgages.

In April 2007 there were 92 products for 100% mortgages, in October 2007 there were 160.

Research found that 2.08m people under the age of 35 planned to borrow over four times their income. Around 828,000 of these people would require five times their incomes and 290,000 would want six times their income.

But this is not necessarily important unless those with negative equity wish to or maybe have to sell their home.

This situation started the buy to let business in the 1990’s when couples would move into one partner’s property and rent out the other.

Neil Simpson is a former Personal Finance Journalist of the Year and writes regularly on pensions, property, insurance and investment issues for the Mail on Sunday, City AM newspaper and many other publications.