Negative equity dread grows as mortgage rates soar – you never forget it

Bank of England Governor 'concerned' about inflation persistence

The spectre is called negative equity and nobody who remembers the horrors it unleashed first time round can forget it.

The 1990s have enjoyed a revival among young people lately, but this is one comeback we could all do without.

Negative equity happens when house prices plunge until your home’s market value is less than the mortgage you took out to purchase it.

The phrase first appeared in 1991, when house prices fell by a thumping 20 percent.

Those worst hit were first-time buyers, who had bought just before the crash with mortgages at high loan-to-values (LTVs) of 90 percent or 95 percent.

They were unable to sell their properties without banking substantial losses, which left them trapped.

The crisis hit property transactions, construction activity and consumer confidence, causing financial hardship for millions. Many had their homes repossessed.

The agony dragged on for five or six years, as house prices didn’t start to recover until 1997.

People talked about negative equity all the time, even if they weren’t affected themselves. That’s how spooky it was. Those who did fall into negative equity thought of little else. 

What happens next could revive some nasty memories.

The 1990s house price crash was triggered by rocketing interest rates, which hit a staggering 15 percent in the summer of 1990, and remained in double digits throughout 1991.

Base rates are much lower at 4.5 percent today but former BoE rate-setter Willem Buiter has just warned they will peak at “no less than six percent” and could go even higher.

Rising borrowing costs will hit a million existing homeowners on variable mortgage rates, plus another 1.3million whose fixes expire this year.

Some have already seen their mortgage repayments double and there’s more agony to come.

Repossession rates are rising sharply with new figures from UK Finance showing a jump of 50 percent in the first three months of this year.

Higher mortgage rates will also hit buyer demand forcing vendors to cut prices.

A sell-off by disgruntled buy-to-let landlords is adding to the pressure, although so far house price dips have been mercifully small.

That could change in short order if mortgage rates hit eight percent, which is another looming danger.

If prices do fall, those hardest hit will once again be first-time buyers who have only just managed to scramble onto the property ladder.

It’s so unfair, but there’s nothing fair or kind or nice about negative equity. 

This makes it a dangerous time for Skipton Building Society to revive the 100 percent mortgage, albeit with a number of safeguards.

You don’t need me to tell you that it would require a very small dip for a buyer with one of those mortgages to fall into negative equity.

Buyers taking out a mortgage at 90 percent or 95 percent LTV also need to tread carefully.

I’m crossing my fingers that the house price crash won’t happen. So far, the market has been surprisingly resilient, despite sharp falls in other countries.

Interest rates are way lower than they were in 1990. Lenders are keen to offer mortgages, and it’s still possible to get deals charging around four percent. Mortgage criteria has been tightened in recent years, with applicants subject to stringent stress testing before being granted a loan.

With luck, inflation will soon start falling, house prices will hold and I’ll have spooked you all for no reason.

Let’s hope so.

There’s an old financial industry saying that the next financial crisis happens when everybody who remembers the old one has retired.

That’s why I’m doing my bit as an old hand to remind people of the damage negative equity does.

I just hope I’m not too late.

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