May 2009

A recent report by research company GFK estimates that 3.8 million households are already in negative equity or 1 in 3 of the 11.7 million households that have a mortgage. Negative equity occurs when the homeowner owes the Mortgage Lender(s) more than the property is worth.

The recent drop in house prices of 15% in 2008, with a further substantial fall likely this year, means the position will only deteriorate. On the positive side many householders with a variable rate mortgage have noticed a dramatic fall in their monthly payments as interest rates have fallen to their lowest level in living memory. To many people therefore, negative equity is only a problem if they need to sell their homes.

To those with significant unsecured debt and negative equity the current situation could be seen as an opportunity. If the last recession in the late 1980’s early 1990’s is anything to go by, those individuals who declare themselves bankrupt, but can afford to continue paying their mortgage, will be able to “buy back” their equity for a nominal sum from the Official Receiver. This is only likely to apply where they have 1 secured lender i.e. there are no second charges. It would however enable a great many people to write off all of their unsecured debt and keep their homes.

We shall have to wait and see how this develops. However the prospect of tens of thousands of households adopting this tactic would have serious repercussions for the Consumer Credit Industry. Their usual warning that individuals’ credit ratings will be affected if they miss payments is of little concern to those who are already in arrears with loans and credit cards. They have already crossed that bridge. To many, the prospect of jettisoning tens of thousands of pounds of unsecured debt that they are struggling to service, let alone repay the capital, may well be worth an adverse credit history.