Sellers loosen grip of negative equity trap

Free at last: Paul Davis has moved up despite his negative equity Photograph by GERAINT LEWIS

THE hardest hit in the housing market have been the estimated 1.5 million who took out large loans to buy property at inflated prices and found themselves saddled with "negative equity", owing more than their homes were worth, as prices fell.

The trap caught almost everyone who had cheerfully taken out a 100 per cent mortgage and the vast majority of those who had borrowed 95 per cent or 90 per cent in the months before the prices peaked in 1988. Inevitably, there were a great many in London, the Home Counties, East Anglia and south-west England, the areas where prices rose fastest in the boom and slumped furthest in the aftermath.

Negative equity hit a generation of buyers accustomed to rising profits producing instant positive equity on every property purchase. People found themselves trapped in their homes.

Even if they could maintain payments on a mortgage, they could not pay it off, and if they could not redeem the mortgage they could not hope to get another mortgage, even on a smaller and cheaper property.

Those who found themselves unable to keep up the payments because of sickness or the loss of a job invariably ran into difficulties. They fell into arrears, and if they were unable to sell their homes for enough to redeem their mortgages, did not even have the option of trading down to cheaper properties. Many had their homes repossessed and lost their properties as well as their savings.

The number of properties where mortgage payments were six months or more in arrears rose from 53,000 in 1988 to 350,000 in 1993, and the number of homes repossessed from 15,000 in 1989 to a peak of 75,000 in 1991. Numbers have since come down, but in the second half of last year 250,000 were still in arrears and another 50,000 homes were repossessed.

The lenders were just as shocked by the turn of events, but in most cases they were covered by the provisions of mortgage indemnity policies imposed on most borrowers wanting upwards of 75 per cent of the valuation to compensate for any shock fall in the property.

The policies were paid for by the borrowers but written for the benefit of the lenders, who were accused of repossessing and selling properties for whatever they would fetch, secure in the knowledge that they were covered. The luckless owners got nothing, and the insurance companies that provided the policies were forced to come up with tens of millions of pounds for losses on the policies they wrote.

The problem is now diminishing, thanks to a standstill in property prices and rising incomes, which have reduced the numbers still trapped with negative equity to around 1.2 million. Under pressure, lenders have also begun to treat the problem more sympathetically, and some of them, such as the Bank of Scotland Centrebank, with its "100 per cent Plus" policy, actually refinance negative equity and enable credit-worthy borrowers to float free and move.

Paul and Marion Davis, with their two-year-old daughter Megan, lived in a one-bedroom flat in Croydon, Surrey, bought in 1989 for £63,000 with a mortgage of £55,800. Expecting a second child, they sold it for £42,000 in February .

They bought a bigger home with a 100 per cent Plus mortgage of £93,600 from Bank of Scotland Centrebank. This represents 95 per cent of the value, or £79,800, with negative equity making up the rest.

The tentative return of standard 100 per cent mortgages from Royal Bank of Scotland andAbbey National has also allowed prisoners to escape and start again elsewhere.

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