How to survive a market crash

If house prices fall, first-time buyers could well be hit hardest of all
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The Independent Online

Last week, former Government adviser David Miles became the latest in a line of economists to warn that house price growth could go into reverse.

Professor Miles, now UK chief economist at Morgan Stanley, has suggested that there could be a house price crash within the next two year, although he cautions that it is almost impossible to say when prices might start to fall. But Prof Miles believes that confidence in the housing market could drop sharply, if house price rises start to tail off.

This will be a worrying prospect for the thousands of home owners - many of them young, first-time buyers - who have stretched themselves as far as they can in order to step on to the housing ladder. Home owners who have put down little or no deposits are the most exposed, because they have little or no equity in their properties to cushion them against a downturn.

According to Moneyfacts, the financial researchers, the number of lenders offering mortgages of 100 per cent or more has grown steadily. Five lenders offer mortgages of between 102 per cent and 125 per cent of a property's value. There are a staggering 200 loans on offer that will go up to 100 per cent.

Steadily rising house prices have forced more and more buyers to borrow up to the absolute limit in order to afford the property they want; most recently, the Nationwide predicted that house prices will rise between five and six per cent next year. Understandably, buyers who delay in order to save for a deposit worry that prices will move even further out of reach.

What could I do about it if I'm hit by negative equity?

The main risk to home buyers, as well as to home owners thinking about remortgaging, is that the predictions will come true, and that prices will start to fall. If that happens in the next two years, there will have been too little time for heavily mortgaged borrowers to have built up any equity.

"House prices have risen continually over the last 11 years but this does not been the future will hold the same fortune," warns Moneyfacts' mortgage analyst Julia Harris. "So you could be trapped in a 'negative equity' situation for years to come."

If prices fall, even by a small amount, home owners could find themselves in negative equity. And given the current levels of house prices, even a small percentage fall would equate to a large loss in cash terms.

A return to the negative equity of the early 1990s would leave home owners unable to move, unless they could cover the mortgage shortfall from savings or other reserves, or through moving to a cheaper property. They might also be unable to remortgage, if negative equity means that they would have to borrow more than even the most generous lender will offer. At best, home owners with negative equity would face a narrower choice of mortgages.

What can I do now to minimise the risk?

Although a 100 per cent mortgage carries risks, a larger mortgage need not be that much riskier.

One reason is that lenders are often quite selective about who qualifies for a higher mortgage. Scottish Widows and Accord limits some of their larger loans to professionals. Other lenders have deals specifically for graduates and others who expect their incomes to rise. The Portman only allows borrowers with large loans to value to take out repayment, rather than interest-only, mortgages.

A 100 per cent plus mortgage might not even mean that a borrower ends up owing more than someone who wants to borrow 100 per cent. Some mortgage companies levy higher lending charges for larger loans.

"If you take out a 100 per cent mortgage and then add a higher lending charge to the loan, you will be borrowing 103 per cent," says Ray Boulger, of mortgage brokers John Charcol. "If you had the cash, then it's likely that you would not need the 100 per cent mortgage. You would be no worse off opting for a 103 per cent mortgage that does not levy the fees."

And, he adds, there is no clear line to cross that makes a particular level of borrowing risky: even someone who puts down a small deposit is exposed to housing market falls, although they will have access to cheaper mortgages.