Making a plus out of a minus for house buyers

Rescue packages from lenders are now enabling home owners with negative equity to move elsewhere, writes Nic Cicutti About 950,000 households, mainly in the South-east, have average negative equit y of £7,000 `How long would it have taken before our original flat was worth what we first paid for it?'

Suzanne and Alan Sherry have fulfilled a dream common to many property owners by selling their first home, a small one-bedroom flat, and trading up to a spacious three-bedroom semi.

Except that in the Sherrys' case they did so while facing a problem familiar to almost a million households - negative equity.

Despite a drop in value of £18,000 on their previous property, the couple, who live in Wanstead, London, moved home thanks to a rescue package from their lender.

Lloyds Bank's negative equity scheme helps those who, like the Sherrys, want to move home but are trapped by negative equity - where the original mortgage is greater than the current value of the property.

Mrs Sherry said: "This has been really helpful. We wanted to own and live somewhere that was bigger.

"We were able to do so even though our first flat, which we bought for £67,000 in 1988, was only sold for £49,000 in May last year."

Research by Woolwich Building Society shows that although numbers have fallen substantially over the past two years, about 950,000 households, mainly in the South-east, still have average negative equity of £7,000.

The Lloyds scheme, which was launched a year ago, allows mortgage-holders to transfer up to £30,000 of negative equity into a new home, borrowing up to 125 per cent of the property's valuation.

They must have held a current account with Lloyds Bank for five years, have held a mortgage for at least two years with any lender, and redeem the earlier loan while simultaneously completing the new purchase.

Because the Sherrys, who jointly run Sherry Design, a graphic design firm in Islington, are long-term Lloyds account and mortgage-holders, these conditions meant that they were able to benefit from the scheme despite being self-employed.

While a choice of repayment methods is available for the main advance, the negative equity element must be on a repayment basis. For every £100 of the negative equity £11 is added to the loan as a fee. This is roughly the amount borrowers would have to pay anyway as a one-off mortgage indemnity premium.

Since the scheme was launched, Lloyds has helped about 820 of its customers with negative equity to move home. Two-thirds of these transferred their mortgage from another lender.

Dennis Holt, head of personal banking at Lloyds, said: "We are delighted to have been able to help so many of our customers.

"Although we expect house prices to move up slowly in 1995, a significant proportion of our householders is likely to remain in negative equity. We anticipate continuing demand for our scheme."

Woolwich Building Society was the first to set up a rescue scheme in 1993. It also operates a separate scheme aimed at parents who want to help their children if they have negative equity problems.

Halifax and Leeds, together with most large lenders, have similar packages for their borrowers.

Under the terms of the Leeds package, prospective clients can borrow up to 125% of the new loan. Halifax wants its clients to reduce their overall borrowings by putting down an additional deposit.

For the Sherrys this was not a problem. "We had £10,000 available to reduce our negative equity, so the loan we needed in addition to the £61,000 we paid for the new house was only £8,000," Mrs Sherry said.

However, the couple also had to pay a further £250 arrangement fee, plus survey costs and the fee on the £8,000 extra they were borrowing, making a total of £1,200. Similar charges are levied by most lenders.

This expense, coupled with the strict conditions that apply to most negative equity rescue schemes, have meant that relatively few people suffering from the problem apply to trade out of their existing homes.

Although the Council of Mortgage Lenders does not have figures for the number of borrowers who benefit from such schemes, Halifax has so far helped 1,500 of its mortgagees, with another 1,500 in the pipeline.

Woolwich's package has helped 400 borrowers, a similar number to the Leeds.

Bradford & Bingley last week completed its 1,000th rescue package. The society has committed £60m to its mortgage rescue scheme.

For Mrs Sherry there are no doubts: "People have asked how we could afford to take an £18,000 loss on our first flat.

"But without this scheme we would not have been able to move somewhere else, which is what mattered most to us."