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Debt misery for 630,000 families trapped in negative equity homes
630,000 families have mortgages that are larger than value of their homesReport warns that more people may fall into negative equityCouncil of Mortgage Lenders estimates the number is actually closer to 800,000 people
01:39 GMT, 26 March 2013
02:24 GMT, 26 March 2013
Around 630,000 families in Britain are in negative equity, which means their mortgage is larger than the current value of their home, an official report revealed yesterday.
The report, from Britain’s new regulator, the Financial Conduct Authority, warns more families might be dragged into negative equity if house prices keep on falling.
Its report, published yesterday, warns: ‘For those holding a mortgage, price falls can leave homeowners with little or negative equity in their homes.
There are 630,000 families are trapped in negative equity as their mortgages are larger than the value of their homes
‘This can leave borrowers with unsustainable burdens of debt, unable to move and restricted in their options to remortgage onto better rates.’
Homeowners in the North have been hit much harder than those in the South, unlike the recession in the early 1990s, according to the report.
This is because house prices have plunged in many parts of the North since the financial crisis struck five years ago, but many parts of the South have been protected.
The average home in the North East has dropped from 127,900 in August 2007 – the month that the credit crunch struck – to 99,295 today.
By comparison, the average price of a home in London has reached an all-time high of 373,210, according to the figures from the Land Registry.
The FCA’s report says one in ten homeowners in both the North East and the North West are in negative equity, compared to only three per cent in the South West and the South East.
As house prices fall there is the risk of more homeowners falling into negative equity
Negative equity creates a major problem for the homeowner because they cannot sell their home without owing a large sum to their lender.
As a result, victims find themselves trapped in their property, unable to sell unless they can find the extra cash.
This is a particular problem if they need to move because they have found a job in a different part of the country, or need a larger home to accommodate an expanding family.
To make matters worse, the FCA’s report may even under-estimate the scale of the negative equity nightmare facing thousands of Britons.
The Council of Mortgage Lenders estimates the figure is even higher, with an estimated 720,000 homeowners in negative equity.
This is far lower than it was during the early 1990s when it peaked at 1.6million.
Repossessions are also lower, with banks and building societies under pressure to be lenient to homeowners, such as offering to cut their monthly payments by extending the life of the loan.
Yesterday Martin Wheatley, chief executive designate of the FCA, said it is ‘a very uncomfortable position’ for homeowners in negative equity.
He added: ‘If interest rates rise, it may become much more of a problem.’
Interest rate are at an historic low of 0.5 per cent, and have been frozen at this level for four years.
The debt charity, Step Change, described the figures as ‘alarming’ and said negative equity can be ‘a trap’ for many homeowners.
Campbell Robb, chief executive of the charity Shelter, said: “The impacts of negative equity can be devastating, in particular for people who have to sell their homes, leaving them chased for crippling levels of debt and often without a permanent roof over their heads.
‘Given the performance of the property market immediately before the recession started, many people entered into homeownership thinking that when it came to house prices, the only way was up.
‘The past few years have left many people in very difficult circumstances they would never have foreseen.’
Many families are being squeezed by rising living costs and falling house values
Overall, the report paints a bleak picture of the financial troubles facing many families as a result of the financial crisis, with people feeling ‘squeezed by rising living costs.’
It says: ‘The true impact of the recession has been masked to date by wage cuts, temporary unpaid leave or reduced hours, and the rise in part-time and self-employment.
‘While these measures have prevented a complete loss of income, they have reduced incomes for those affected.’
The FCA, which takes over from the Financial Services Authority next month, said the lack of pension saving has created a hole which is ‘too big to fill for a lot of households and will leave many with insufficient future income.’