More than one way out of negative equity

ANOTHER 40,000 UK households slipped into negative equity in the final three months of 1995, bringing the total to more than 1.16 million.

This means that 11 per cent of mortgage borrowers now own houses worth less than the money they owe on them. The average "overhang" - the difference between the value of your house and your outstanding mortgage - is pounds 7,000, rising to pounds 10,000 for properties in London and the South-east.

Negative equity is only a problem if you want to move. It should erode over time as house prices eventually recover. Peter Robinson, chief executive of the Woolwich Building Society, says he expects house prices to rise by about 2 per cent this year, which should take 250,000 households out of negative equity. If your overhang debt is only a small one, the answer may be simply to sit tight.

A common tack taken by lenders to help out borrowers has been to offer their existing customers a new mortgage, allowing them to sell their old house and transfer as much as pounds 25,000 of negative equity to a new property, providing the total new loan is still less than 125 per cent of the new property's value. The new loan then becomes repayable at the society's standard variable-interest rate. These schemes, known as negative equity mortgages, were pioneered by the Halifax, which launched one in October 1993. The society says more than 2,600 customers have moved house with the help of a negative equity mortgage. Other lenders with similar schemes include Cheltenham & Gloucester, Nationwide and Woolwich, although each lender's scheme differs slightly.

Of course, a negative equity mortgage is not much use if you are unable to find a buyer for your current home. In many cases, it also does nothing to actually clear your negative equity. Its chief virtue is that it will allow you to move house while you wait for property prices to recover.

You may find your lender is willing to offer you such a scheme only if you can show a good repayment record over the past three years or so. Most lenders also insist that the new loan be repaid in 20 years.

Phil Jenks, lending controller for the Halifax, says: "Most of the people who have negative equity are being extremely responsible. Certainly, the people who are thinking of moving and asking us questions are very confident of clearing their negative equity over time."

If you do not qualify for a negative equity mortgage, or want to clear part of your debt rather than simply move house, you may be able to raise some cash - by cashing in investments, for example - to make a lump-sum repayment.

Julie Lord, of Cavendish Financial Management, a financial adviser in Cardiff, says: "Obviously you could realise your PEPs, your Tessas or any other investment. But in my experience the people who are suffering from negative equity are those who bought in the late Eighties, and they are usually younger people who may not have much in the way of savings."

Mr Jenks says many people manage to raise a lump sum from their families: "There's a fair few grandparents who've helped out, and people clearly have been saving more over the past two or three years." However, paying off a lump sum is not a helpful solution if you have a fixed-rate mortgage, as you may find yourself faced with an early redemption penalty.

Another route is to let out part of your home. The first pounds 3,250 of each year's rental income is tax-free, and this could be used to pay off your overhang debt gradually. If you plan to let out a room, you should inform your lender and insurer first. The Department of the Environment produces a free advisory leaflet. For a copy, phone 0181-691 9191.

How a negative equity mortgage works:

Outstanding loan: old house:

pounds 70,000

Current value of house pounds 58,000

Negative equity pounds 12,000

Current monthly payments:

C&G (7.73%) pounds 553.26

Halifax (7.49%) pounds 543.70

Nationwide (7.44%) pounds 493.79

Price: new house: pounds 65,000

Neg equity transferred pounds 12,000

Total new loan pounds 77,000

New monthly payments:

C&G pounds 611.48

Halifax pounds 600.87

Nationwide pounds 697.24 for first year, then

pounds 545.99