Falling prices raise the risk of negative equity – where the value of one’s home drops below the outstanding mortgage, an expert has warned.
Falling house prices also take a toll on a homeowner’s resilience in retirement as remortgaging becomes difficult and expensive if the mortgage is big.
This raises the risk of negative equity for those with small deposits.
The HL Savings & Resilience Barometer works on the basis that house prices will fall 5.9 percent during 2024.
The research found that by the end of this year, one in four people with mortgages will be at risk of running into difficulties, because their repayments make up more than a quarter of their disposable income.
Sarah Coles, head of personal finance, Hargreaves Lansdown: “Falling house prices strike fear into the heart of any homeowner. This isn’t just the worry of being less well off on paper.
“For those who have relatively little equity in their home, or a large mortgage, there are real implications both in the short-term and in retirement too.
“Falling prices raise the risk of negative equity. The smaller the equity you have in your home, the bigger the risk. It means the danger will be magnified if the idea of 99 percent Government-backed mortgages goes ahead.”
The scheme, which is reportedly being considered by the prime minister, Rishi Sunak, and the chancellor, Jeremy Hunt, before the spring budget on March 6, would only require borrowers to put down a one percent towards their first home.
The programme would undoubtedly help some of generation rent get on the housing ladder, but industry experts warned that ministers needed to consider the consequences of pushing more buyers into the market.
Brokers warned that such a scheme could expose borrowers to unmanageable debts similar to those still carried by some buyers who were offered 100 percent plus mortgages, worth more than the price of their home, during the 2008 financial crash
The scheme has been floated ahead of the budget. So far, it’s just one of many things being discussed, but reducing the amount of equity people have in their home is “a risky strategy at a time of falling prices,” she said.
Ms Cole explained that for those who are forced into selling because of affordability issues or life changes like divorce, negative equity becomes a major issue.
Lower house prices also cause problems if someone has a looming remortgage. Falling prices would cut their equity stake, and the less equity they have, the higher the mortgage rate they’ll usually pay. This is a particular headache for those with bigger mortgages.
Even with mortgage rates slowly falling, a remortgage will still dramatically increase monthly payments. This will take a significant toll, especially on Generation X, who are already paying an average of £863 a month.
Ms Cole said: “When you combine this with other rising prices, by the end of this year, one in four people with mortgages will be at risk of running into mortgage difficulties, because their repayments make up more than a quarter of their disposable income.
“At that stage, 340,000 households will be at ‘high risk’ because in addition to hefty mortgage repayments they don’t have enough emergency savings (to cover at least three months’ worth of essential spending). 390,000 will be at ‘critical risk’ because in addition to both these things, they have unsustainable levels of spending.”
