As the effect of falling house prices continues to be debated, analysis from GE Money Home Lending reveals the extent to which house prices would actually have to drop for average borrowers, who purchased a property over the past 13 years, to suffer negative equity. GE Money Home Lending has identified the ‘equity cushion’ that should hopefully insulate home owners from experiencing negative equity.
According to the analysis, a homeowner who purchased a property with an average deposit on an interest only basis as recently as last year, has a cushion of equity which would mean their house price would need to fall by a fifth (19%) before they would experience negative equity. For those who bought in 2004 and paid the average deposit of £50K, rising prices have resulted in an equity buffer of some 48%.
The picture for the average borrower who purchased in the 1990s is even more reassuring. A householder purchasing a property on the same terms in 1995 would need prices to depreciate by almost three quarters (72%) for the value of the property to be lower than the finance owed. Even as recently as 1999 the average home cost less than £100K, so a typical borrower has an equity bulwark against potential losses, which means the property would need to experience 63% depreciation to be in negative equity.
Gerry Bell, head of mortgage marketing, at GE Money Home Lending, said: “While we have witnessed depreciation in house prices over the last year, the fall in property values has been relatively modest compared to the significant inflation over the past decade or so. Taking into consideration the average deposit borrowers have paid and assuming no additional lending of overpayments, prices would need to fall by over a third for the average home owner who purchased their property five years ago to experience negative equity.
“Ultimately the concern in the current marketplace is for the small number of borrowers who put down a very small deposit who may now be feeling overstretched. However for the vast majority of UK consumers, the historic growth in the market has provided a welcome cushion against these falls.”
