Up to 630,000 borrowers are stuck in negative equity as the housing market stagnates

New consumer finance watchdog warns further pain could be on the way despite Budget pledges

Up to 630,000 home loan borrowers are caught in negative equity, the UK’s new consumer finance watchdog said today.

The estimates were included in the Financial Conduct Authority's latest risk report, published alongside the new regulator's business plan for the coming year.

The FCA, which formally comes into being in April, estimates between 160,000 and 630,000 borrowers were in negative equity in January this year. The forecasts are based on house price indices compiled by lenders Nationwide and Halifax, as well as house price consultant Acadametrics.

The estimate - drawn from the Halifax's index, which shows house prices still 18 per cent below their peak in August 2007 – puts 6.4 per cent of Britain's 9.8m homeowners under water. But further pain could be on the way despite the Chancellor's attempts to reinflate the housing market in last week's Budget, the report added.

The FCA said: "Given that house prices remain out of line with their fundamentals, there could be further price falls, particularly if economic or financial conditions deteriorate. For those holding a mortgage, price falls can leave homeowners with little or negative equity in their homes, which can leave borrowers with unsustainable burdens of debt, unable to move and restricted in their options to remortgage on to better rates."

Despite the alarming figures, homeowners are faring far better than in the recession of the early 1990s.

Then around 1.1m borrowers were in negative equity – more than 10 per cent of mortgaged households – according to Bank of England estimates.

During the 1990s, negative equity was concentrated primarily in the South but this time around, the recession has hit the northern regions hardest, putting more homeowners in the North under pressure. The latest figures from property website Hometrack underlined the north-south split in the housing market as prices are buoyed by a lack of supply of homes and increasing demand.

House prices in London are growing at more than twice the national average – up 0.7 per cent in March – while homes in the capital are being snapped up at their fastest rate since the peak of the housing market in 2007. Across the country overall in the past two months the supply of housing for sale has risen by 13 per cent, but demand has risen by 19 per cent, Hometrack added.

Alongside a sluggish economy, the FCA's report added that the biggest risks included firms not designing products in consumers' long-term interests, as well as a lack of transparency for customers on financial products and services, and cyber attacks on payment systems.

It added: "There is an increasing threat of outside [cyber] attacks, which pose operational risks to firms and threaten market integrity through service disruption, breach or theft of personal information."

The regulator comes into being next month when the Financial Services Authority is split into the FCA and the Prudential Regulation Authority, which will be responsible for monitoring the health of the financial system and comes under the direction of the Bank of England.