When home sweet home is just loan, loan, loan

Mr and Mrs Barrett took on the Halifax and won. But it doesn't remove the negative equity from others' backyards, says Nic Cicutti
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The Independent Online
Nasty building society gets it in the neck as High Court stands up for the rights of long-suffering homeowners facing negative equity. Beaming solicitor says this could fundamentally change the lives of millions.

You have to admit, it has all the ingredients of a good summer story. Except that, as up to 1.5 million people with loans greater than the value of their homes will shortly discover, the reality is that hardly any of them are in a position to benefit.

For more than 130,000 households in arrears of 12 months or more on their mortgages, the fear of losing their homes continues unabated.

On the surface, Edward and Doreen Barrett have won a famous victory. The Barretts took Halifax building society to court when they were told they could not sell their home in Battersea, London, for a fair price. The couple wanted to accept an offer of pounds 250,000 for their house. The Halifax, to which they now owed pounds 324,000, said it wanted them to pay the conveyancing costs. The couple had no money for solicitors' and estate agents' fees - hence the court case. In the end, the judge, Mr Justice Evans-Lombe, overruled Halifax's decision to insist on receiving the full sale value of the Barretts' home.

The right of homeowners to sell their property on the open market has been a matter of case law for more than two years. Back in 1993, Palk V Mortgage Funding Services was to have changed the face of homeowning history when a court held that the borrower could sell his or her home with negative equity even if doing so ran counter to the lender's wishes.

What has happened since then? Not much, according to Sue Anderson at the Council of Mortgage Lenders: "Despite all the predictions, there have hardly been any reports of borrowers exercising their right to such a course of action. In practice, things have continued as before."

The reason for this lies in the nature and amount of negative equity, averaging about pounds 7,000 per property, and the strategies used by most borrowers for coping with it.

In the past six years the majority of the estimated 1.5 million households suffering negative equity has accepted that they will pay more than their house is worth.

Of course, this has other consequences. People do not move home as they might have done in the heady 1980s because - irrespective of whether lenders let them sell at a loss - they are not particularly willing to do so.

Hence the fact that despite much-publicised rescue schemes in place from most lenders, only a few thousand borrowers have taken advantage of them. The high cost of such rescue schemes, running to several thousand pounds for an average pounds 50,000 mortgage, doesn't help either.

The real problem is that faced by those in arrears. More than 130,000 homeowners owe more than 12 months' worth of mortgage. For them, the likelihood is that they will never be able to pay the money back.

Indeed, as their arrears increase, they are the ones most likely to face repossession. Once repossession has taken place, the property can then legally be sold in just the way that the Barretts were opposed to.

Sue Anderson, speaking for mortgage lenders, said: "The legal judgment we have just received is not the solution to the problem. Even if a person is able to sell at a loss and they do not have to meet the conveyancing costs separately, they will simply be added to the overall debt."

Chris Holmes, director of Shelter, the campaign against homelessness, said to solve the problem the Government should drop its proposed cuts to income support for people with mortgages, to be introduced in October.

Mortgage benefit should also be extended to people on low incomes so they can afford to work without the fear of being caught in the benefit trap. Shelter wants lenders to extend mortgage rescue schemes so that even if people no longer formally own their homes they can remain in them as tenants or part-owners.

Sadly, its hopes are likely to be ignored. Repossessions, now averaging 1,000 a week, are below the levels of two or three years ago, when the Government was panicked into taking some action.

Nor is it certain the Barretts are the real winners. Once they have recovered from the euphoria of being everyone's media darlings, they will discover that they are minus their home - and that they will owe the Halifax a whopping pounds 75,000 for the rest of their lives.

'If I had the chance, I would do it again'

Billy King is a 46-year -old senior nurse. He now lives with his partner in Harwich.

Mr King's journey up the private housing ladder began in 1982 when, as a student nurse, he decided to buy the council house in Witham, Essex, that he had lived in with his family for more than a decade.

After he qualified as a nurse, Mr King repeatedly traded up, each time making a small profit on the transaction. After his first divorce, he moved to Harwich.

"It was 1988 and, with my second wife, I bought a huge house for pounds 92,000, on which I was able to put down a deposit of pounds 22,000. Then the problems started. My second marriage went bad and I found out that my low-start mortgage meant that the lender kept on adding unpaid interest to the loan. Within a couple of years, I owed pounds 90,000.

"In 1991, I spoke to the lenders and they implied that if I paid back the arrears of pounds 5,500, I would be able to transfer the mortgage into my name only. It took me three years to do that.

"When I went back to them, they claimed that on my income, I would not be able to service the cost of the loan and they were not prepared to switch the mortgage. I wrote to them saying that I was no longer prepared to pay the mortgage. I have lost my deposit and, because of the slump in the market, the house is probably only worth about pounds 68,000. I will owe pounds 25,000 for the rest of my life.

"I still believe in the idea of owning your own home, though. If I had the chance, I would probably do it again." Nic Cicutti

'I usually slag off banks, but not Lloyds'

Suzanne and Alan Sherry, both 30, from Wanstead, London, are an example of how, with the help of an understanding lender, a move to a larger and more expensive home can be made despite negative equity.

"We'd been living in a one-bedroom flat in South Woodford, E18, for six years. It had no garden and over the years we began to build things up and were cramming it out. We wanted to move to a bigger place.

However, our home had fallen in value by pounds 18,000 from when we bought it for pounds 67,000 in the boom time, around 1988, so it was obviously difficult to move to a bigger place. We tried renting a two-bedroom flat and renting our own place out but it proved to be too much of a hassle.

Eventually we went to Lloyds, with whom we have our mortgage.They were just starting up a negative equity scheme. It allows mortgage holders to transfer up to pounds 30,000 of negative equity into a new home, borrowing up to 125 per cent of the property's value.

As we are self-employed - we run Sherry Design, a graphic design firm in Islington - we thought it may prove difficult to get the extra loan, but because we were long-term mortgage holders we could still benefit from the scheme.

I'm usually the first to slag off banks but Lloyds were really good to usWe're now in a three-bedroom semi, which is costing not much different from what we were paying for the original flat in 1990, bearing in mind the interest rates then. One day we may end up even-stevens!" John Cassy

What to do if it all goes wrong

* If you fall ill, check whether you have a policy that might cover all or part of your lost income.

* Check whether you have a mortgage protection policy through your lender.

* Immediately inform your lender and agree in writing a repayment schedule you can afford. If you need a period when no repayments are made, ask for one.

* Sign on. If your mortgage is pounds 100,000 or less you may be entitled to state benefits. If you live with a partner in work, your entitlement to benefits may be affected.

* Should the arrears get too high, the lender will probably apply to a County Court for a possession order. Unless you keep up with the repayments, plus a bit more for the arrears, the lender can go back to the court and repossess your home. Should this happen, contact your nearest Citizens Advice Bureau, Shelter, or Law Centre.

* Ask your lender whether it has an equity-for-rent scheme, where you carry on living in the property but pay rent n pay the money to the lender in addition to the home's sale price.

* Finally, though it can be painful to admit it, it may sometimes be better to give up your home rather than go through the agony of constant battles to keep it, only to lose anyway. Know when to retain your sanity.