GE gives negative equity perspective

Research from GE Money Home Lending has revealed the extent to which house prices would actually have to drop for average borrowers to suffer negative equity.

The specialist lender has identified the equity cushion that should hopefully insulate homeowners from experiencing negative equity.

According to the analysis, a homeowner who purchased a property with an average deposit on an interest-only basis as recently as last year has a cushion of equity which would mean their house price would need to fall by a fifth before they would experience negative equity.

For those who bought in 2004 and paid the average deposit of £50,000, rising prices have resulted in an equity buffer of some 48%. The picture for the average borrower who purchased in the 1990s is even more reassuring. A householder purchasing a property on the same terms in 1995 would need prices to depreciate by 72% for the value of the property to be lower than the finance owed. Even as recently as 1999, the average home cost less than £100,000, so a typical borrower has an equity bulwark against potential losses, which means the property would need to experience 63% depreciation to be in negative equity.

Gerry Bell, head of mortgage marketing at GE Money Home Lending, said: “As house prices soften, many commentators understandably warn of the potential of negative equity in some parts of the market. However, it is also important to look at the broader picture.

“Over the past decade homeownership has delivered fantastic returns for many borrowers and we would need to see unprecedented falls in property prices for the average homeowner to be severely impacted. Homeowners who purchased their property just four years ago for instance, even without a deposit, have an equity cushion of almost 50% before the value of their home loan would exceed the property value.

“While we have witnessed depreciation in house prices over the last year, the fall in property values has been relatively modest compared to the significant inflation over the past decade or so. Taking into consideration the average deposit borrowers have paid and assuming no additional lending of overpayments, prices would need to fall by over a third for the average home owner who purchased their property five years ago to experience negative equity.”