Page last updated at 05:18 GMT, Friday, 17 April 2009 06:18 UK

Negative equity stops home moves

Looking in an estate agent's window
First-time buyers have almost disappeared from the market

Falling house prices mean that two million households have either negative equity, or too little equity to finance a house move, lenders have said.

Negative equity is the situation where someone's house has become worth less than their mortgage.

Research by the Council of Mortgage Lenders (CML) said the problem would restrict the number of home sales.

But it said two thirds of the 900,000 homes in negative equity had only a modest shortfall of less than 10%.

That equated to an average of about £6,000 for first-time buyers in that situation, and £8,000 for the other home owners.

"Although negative equity has resurfaced as house prices have fallen, one big difference from the early 1990s downturn is that it is less concentrated among young, first-time buyers, and more evenly spread across wider age groups and those at different points on the housing ladder," said Bob Pannell, head of research at the CML.

"Negative equity will contribute to subdued property turnover, but otherwise should have few adverse effects for the majority of households affected," he added.

Small deposits

With lenders still restricting their lending because of a shortage of mortgage funds, few are currently prepared to accept a deposit of only 10% from anyone buying a house.

Negative equity... only surfaces as a problem if households need to move, or are also experiencing repayment difficulties

Recent figures from the financial information service Moneyfacts showed that there were currently only 106 mortgage deals requiring a deposit of 10% or less, while more than two thirds of the 1,485 deals available asked customers to put up a deposit of at least 25%.

The impact is that even people who still have some limited equity in their homes, but less than 10%, are unlikely to be able to move.

The CML estimated that there are about 600,000 mortgage holders who have less than 5% equity in their homes, plus another 500,000 whose equity would amount to a deposit of more than 5% but still less than 10%.

Thus about two million homeowners in total could not raise a 10% deposit for a new mortgage simply by selling their current homes.

1990s comparison

The CML carried out its research by looking at data supplied by its members.

With house prices dropping by about 18% since the middle of 2007, the fall in prices has already outstripped the national price drop experienced during the early 1990s house price crash.

But the 900,000 estimated to be in negative equity now are fewer in number than the 1.5 million estimated to have been in this position more than a decade and a half ago.

Of the households currently in negative equity, about 270,000 have a shortfall of between 10% and 20%, and about 30,000 have a shortfall of 20% or more.

In those most extreme cases their negative equity amounts to an average £28,000 for first-time buyers and £37,000 for other home owners.

Despite this, the CML argues that it is myth that there is a strong link between negative equity and mortgage repayment problems.

"Payment problems are typically associated with unexpected spending commitments, reduced income and changes in household circumstances," the CML said.

"Negative equity, on the other hand, only surfaces as a problem if households need to move, or are also experiencing repayment difficulties," it added.

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