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Negative equity problem has eased, mortgage lenders say

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Image caption In the 1990's, negative equity was frequently associated with home repossessions.

The problem of negative equity has eased in the past year, according to research from the Council of Mortgage Lenders (CML).

It said the number of borrowers whose mortgages are bigger than the value of their homes has dropped by 13%.

The CML said the drop, of 100,000 to 719,000, had occurred despite a modest further fall in average house prices.

It means borrowers have been paying off their mortgages faster than the value of their homes has been falling.

The position has also been improved by prices rising, against the national trend, in some parts of the country such as London and the South East.

"Most mortgage holders are in a reasonably comfortable equity position, but the house price falls since 2007 have eroded the equity position of households," the CML said.

"We estimate that around 719,000 households currently have some negative equity, but the encouraging news is that this represents a 13% decline in the number of borrowers with negative equity from our previous estimate of 827,000 in first quarter of last year."

Larger equity cushion

The CML carried out its research by looking at its members' data on seven million mortgages, out of the 10 million outstanding, between the first quarter of 2011 and the first quarter of 2012.

As before, the problem of negative equity is worst for those who bought homes during the peak of the last property price boom, the years from 2005 to 2008 inclusive.

The CML found that:

  • of all buyers who have taken out mortgages since the second quarter of 2005, only 10% are now in negative equity.
  • of the 90% who have some equity in their homes, more than half own at least 30% of their homes outright, and more than 80% have an equity cushion of at least 10%
  • of first-time buyers who bought since 2005, the proportion in negative equity has dropped from 26% to 20%.

In the past few years, negative equity has been far less of a problem than during the recession and house price slump of the early to mid 1990s.

Then, high unemployment and high interest rates meant that many people in financial difficulty could no longer keep up their mortgage repayments and had their homes repossessed.

If they were also in negative equity the lenders continued chasing them for any mortgage shortfalls after the repossessed homes had been sold.

By contrast in recent years, ultra-low interest rates and much stricter rules inhibiting repossessions have seen fewer people losing their homes than many experts had predicted.

The CML's research shows that negative equity is worst in Northern Ireland where house prices have gone through a much sharper boom and bust than in the rest of the UK.

There, of those who have taken out a mortgage since 2005, 35%, or 69,000, are still in negative equity.

On the UK mainland, the problem is worst in the north-west of England (15%), Yorkshire & Humberside (15%) and Wales (14%).

The least affected regions are the South East (5%) and Greater London (6%).

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