One in 10 will face negative equity if house prices fall as expected

Linda J. Dodson

More than one in ten mortgage borrowers will fall into negative equity in the event of a house price crash – and young families are most at risk, an influential think tank has said.

The Resolution Foundation said 11pc of homeowners would see their property value fall to be worth less than their outstanding loan if house prices plummet in line with official predictions.

Around 11 million families have a mortgage, according to the banking trade body UK Finance, meaning more than 1.2 million are at risk.

The Government’s independent forecaster, the Office for Budget Responsibility, has said it expected residential property prices to fall by 16pc in the worst case scenario.

This would lead to the largest increase in negative equity levels since the financial crisis – when a 17pc fall in house prices meant 15pc of borrowers went into the red.

The Resolution Foundation report said millions of families face being tied to their homes – unable to sell without realising a substantial loss – and could be forced to pass up opportunities to relocate or pursue more lucrative job opportunities.

Negative equity also threatened to leave borrowers with thousands of pounds in increased mortgages costs. Those forced to sell at a loss would also have to use other assets to make up what is owed to the bank.

Young families with large outstanding mortgages could be blindsided by an “unexpected negative equity crisis” once the true economic impact of coronavirus is realised, the report warned. This is because house prices have been rising since the market reopened after being shut down in March.

However, experts have called this a “false dawn” with the current boom only predicated on pent-up demand built up during lockdown and the Government’s temporary stamp duty holiday.

Support from banks in the form of mortgage holidays and the Government’s £35bn furlough scheme to protect jobs also both end in October. This will lead to an increase in unemployment and the number of homeowners who fall behind on mortgage payments. Many could become forced sellers and house prices spiral downwards.

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