Article Category
Home owners set to ride out the slump
Buyers are still sitting on an 'equity cushion'
Posted: 2008/07/03
HOME owners were yesterday given fresh hope of protection against a slump in house prices.
They would have to plummet by more than half before the majority of householders were hit by the curse of negative equity, research claims.
Owners of an average property bought with a £27,000 deposit in 2000 are sitting on an "equity cushion" of 58 per cent - the amount values would have to drop before the mortgage exceeded the property price.
Those who bought as recently as 2004 still have a cushion of 48 per cent while in London and the South-east prices would have to sink by three-quarters for the owners to suffer negative equity.
Gerry Bell, head of mortgage marketing at GE Money Home Lending, said: "Over the past decade home ownership has delivered fantastic returns for many borrowers and we would need to see unprecedented falls in property prices for the average home owner to be severely impacted.
"Concern in the current marketplace is for the small number of borrowers who put down a small deposit and may now be feeling over-stretched. For the vast majority of UK consumers, the historic growth in the market has provided a welcome cushion."
An owner with an average deposit on an interest-only basis who bought for £219,410 last year, has a cushion of equity which would mean their house price would need to fall by almost a fifth before they would experience negative equity.
A householder purchasing a property on the same terms in 1995 at a price of £68,079 would need prices to depreciate by nearly three-quarters for the value of the property to be lower than the finance owed.
Even as recently as 1999, the average home cost less than £100,000, so a typical borrower has an equity safeguard against potential losses, which means the property would need to experience 63 per cent depreciation to be in negative equity.
More than 8,000 people are already in negative equity and more than 23,000 would be if house prices fell by 10 per cent.
Negative equity has not been a serious threat in Britain since the early 1990s when tens of thousands lost their homes as they were unable to repay mortgages.
