Positive solutions to negative equity

Autumn Property Survey: James Hipwell looks at a range of mortgage sche mes that allow sellers to escape the trap

ACCORDING to the Woolwich Building Society, more than 700,000 families have escaped from the negative equity trap since the problem peaked during the first quarter of 1993. It is now at its lowest point since late 1991, thanks mainly to a margina1 increase in house prices. The Woolwich says that in two or three years, negative equity will be little more than a bad memory. Given that the average sufferer's property is worth pounds 7,000 less than the outstanding mortgage, any moderate increase in house price inflation should cure the problem.

But there are still nearly a million people with negative equity - that is, their loans are larger than the reduced value of their properties, so they cannot redeem their mortgages even if they sell.

So long as they do not wish to move and can keep up the payments, there is no immediate problem. But if borrowers in negative equity fall ill or are made redundant, they face early repossession, since there is nothing to be gained by allowing interest to add to the debt.

As time goes by, a growing proportion of them would like to move or need to move. There are two options if you owe more on your mortgage than your property is worth: sit tight and wait for an upturn before selling at a profit; or sell at a loss by taking another loan on a new home.

All the big lenders will now consider helping customers unable to sell their home at a profit, so if your loan is with a high street bank or a top 10 building society, you should go back to them first. It will help if you have a good reason to move and a sound repayment record.

Ken and Nicky Chapman found themselves with pounds 20,000 of negative equity on a flat in Beckenham, south London. With their second child on the way, they needed to move, and were able to do so with a 100 per cent "Plus" mortgage from Bank of Scotland Centrebank, which lends up to 120 per cent of the value of the property the borrowers move to, subject to a maximum excess of pounds 25,000.

Some lenders have special negative equity schemes, whereas others prefer to consider individual cases and tailor a solution. The scheme favoured by most lenders allows borrowers to take their negative equity with them when they move. Instead of being limited to a mortgage of up to 95 per cent of the value of the new property, negative equity mortgages allow a loan of up to 125 per cent. Borrowers are allowed to move to a more expensive property and take the shortfall with them as part of their new mortgage.

A negative equity mortgage is made up of two parts: a 100 per cent loan on the new property, plus another loan to cover the negative equity on the old property. The part used to cover the negative equity is covered by an unsecured loan and is usually limited to a maximum amount. For example, Nationwide Building Society's scheme allows a borrower to transfer a shortfall of up to pounds 25,000, as does the Abbey National one.

Most lenders put an upper limit of 125 per cent of the new property's value on what you may borrow.But Neil Nash-Smith of Blackstone Franks, the London mortgage broker, says he can do better than 125 per cent if necessary, provided borrowers have the income to service the increased loan satisfactorily.

Another possibility is for borrowers to take out a 100 per cent loan to buy a new property, and continue to service the existing loan by letting out the old property, which would have been unthinkable a few years ago.

Another solution for negative equity brings your parents into the equation by taking into account the equity of their home. One of the first lenders to operate this sort of scheme was the Woolwich with its Parent Line, which allows equity in the parents' home to be used as temporary security for a top-up on their son's or daughter's new mortgage. However, responsibility for repaying the loan remains with the offspring.

Alternative schemes involving parents allow customers to borrow up to 100 per cent of the purchase price, with the parents themselves taking out a further advance, remortgage or second mortgage to repay the amount that needs to be made up. Bradford & Bingley Building Society operates a scheme like this and says it is its preferred option.

q James Hipwell is deputy editor of 'Your Mortgage' magazine.