3 million British homes could be plunged into negative equity

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by Kay Murchie

According to MPs, by next April three million British families could be plunged into negative equity (where your home is worth less than your mortgage).

The Council of Mortgage Lenders (CML) confirms three million families currently have properties with a loan-to-value ratio of more than 90%.

Liberal Democrat shadow chancellor Vince Cable said the figure, based on expert City analysis, ‘was not alarmist but highly plausible’.

If prices fall by 10% over the next 12 months, they will find themselves in the black hole of negative equity, he added.

Mr Cable said some are already there. It is becoming increasingly clear that the downturn in the housing market is much more than just a blip. As the credit squeeze continues to restrict lending and with many people saddled with masses of personal debt, a dramatic fall in mortgage approvals was inevitable.

The news follows announcements that lenders are scrapping cheap mortgage offers, internet bank, first direct, announced earlier this week that it has temporarily withdrawn all its mortgage products as it tries to clear a backlog of customer applications.

Alliance & Leicester and Scottish Widows have both curtailed their product ranges and Northern Rock recently set its new mortgage rates at uncompetitive levels, in a conscious effort to drive away new business.

Furthermore, the Co-operative Bank has withdrawn its two-year mortgage deals while Lehman Brothers, the US investment bank, is also withdrawing from the UK mortgage market. The Halifax warned that its mortgage costs are set to increase.

The gloom continues with the Bank of England showing 73,000 mortgages for home buyers were approved in February, down almost 10% on November last year.

A spokesperson for the Bank of England warned that a cut in the interest rate next week was far from certain.

Furthermore, the International Monetary Fund said there was a 25% chance of a world recession, citing the worst financial crisis in the US since the Great Depression.

Cheap mortgage deals being withdrawn is a concern for homeowners and anybody trying to re-mortgage. Previously, they could choose from a vast selection of competitively-priced deals.

David Hollingworth, of mortgage brokers London & Country, said the situation was unprecedented. Lenders have always cut deals, but this is day in, day out, week in, week out, concluded Mr Hollingworth.