The governments new financial regulator has warned that as many as 630,000 families could be in negative equity. The Financial Conduct Authority has estimated that the number of people where their mortgage exceeds the value of their home is between that figure at the top end of the scale and 160,000 at the bottom.
They have based those figures on different submissions from the mortgage industry and property analysis. However, the report also suggests that the problem is probably not as bad as it was after the property crash of the early 1990s and it indicates a regional reversal for negative equity today.
The FCA’s Risk Outlook report states: “According to the Bank of England, negative equity affected around 10.5 per cent of mortgaged households. At national level, this is significantly more than today’s estimates imply. However, at regional level the picture is different.
In the 1990s, negative equity was concentrated primarily in the southern regions of the UK. This time around the recession has hit the northern regions hardest and, as a result, negative equity is more concentrated in the North.”
The report also warned that more families would be dragged into negative equity if house prices were to fall, and highlighted problems it creates for those effectively barred from switching mortgages to cheaper deals.
Most lenders require a deposit of at least 10 per cent, with the best rates reserved for those with deposits of more than 40 per cent. Martin Wheatley, chief executive designate of the FCA, which takes over from the Financial Services Authority next week, said it was ‘a very uncomfortable position’ for homeowners in negative equity and added that if interest rates were to rise it could become much more of a problem.
Last week the Government outlined plans for a Help to Buy Scheme, with 5 per cent deposits on newbuild boosted to 25 per cent by a state guarantee, and with further guarantees made to extend credit to existing homeowners. However, critics of the scheme argue that it is a plan aimed at pushing up prices rather than making homes more affordable.
Analysis of plans set out by Chancellor George Osborne to make it cheaper for people to take out loans shows that people from inside and outside the European Union could qualify. A leading law firm has suggested that EU and non EU residents will be able to get government-backed mortgages. In the analysis it was stated that human rights rules would make it impossible to stop foreigners from taking advantage of the scheme.
David Anderson, a partner at SykesAnderson, said that it would be difficult to stop EU nationals and EU residents, because by doing so it would be preventing the free movement of labour. If someone wanted to come and work here and they could not have access to the same finance as an English person, that would be a case for discrimination.
Mr Anderson added that it would not be a reason to stop someone taking part in the scheme if they had not contributed to the tax system here. There have been calls for the scheme to be amended, including one from Sir Andrew Green, of Migration Watch, who observed that it would be very unfair if foreign purchasers of property in Britain were to be subsidised by British taxpayers.
The Government’s multi-billion pound ‘Help to Buy’ scheme was a central feature of Chancellor George Osborne’s budget. Government figures suggest that 190,000 people a year will benefit from the scheme whereby buyers would be able to put down a mortgage deposit of as little as 5 per cent, with the Government underwriting 15 per cent of its value.
However, the scheme has been criticised because ministers have been unable to guarantee that well-off families would be able to use the cheaper mortgages to buy a second home.