According to debt management experts Baines & Ernst, part of the Paymex Group, householders affected by negative equity are more likely to miss mortgage repayments and face the risk of repossession. This is despite claims by the Council of Mortgage Lenders (CML) that there is no strong link between negative equity and mortgage repayment problems.
Nick Pearson, Director of External Affairs at Baines & Ernst, explains: “A significant number of people will have stretched their finances to the limit to afford high house prices during the property boom. These same people have since been affected by rising living costs and are increasingly experiencing mortgage repayment difficulties as the economy sinks further into recession.
“Negative equity reduces their options of downsizing or relocating to reduce mortgage repayments if they get into mortgage arrears, leading to repossession. The fall in property values can mean that the repossessed property does not generate sufficient funds at sale to cover the mortgage and associated legal fees. This will lead to more people filing for bankruptcy as they are unable to repay debts, which can often amount to tens of thousands of pounds.”
According to the CML, around a third of the 900,000 homes in negative equity face a shortfall in value of between 10% and 20%, with about 30,000 properties suffering a shortfall of 20% or more. The Financial Services Authority (FSA) reported that a total of 46,750 properties were repossessed in 2008.
Pearson concludes: “The economic downturn has caused lenders to become more realistic when talking to borrowers about repayment of mortgage arrears. However, they are not in a position to review people’s finances including other potential areas of personal debt such as credit cards or loans. If people are experiencing mortgage repayment difficulties, it is advisable to seek expert advice as soon as possible. This can help avoid repossession and bankruptcy.”
