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90,000 first-time buyers face negative equity remortgage risk

mortgage
mortgage

Nearly 90,000 first-time homeowners who bought properties in 2020 and 2021 could effectively be barred from remortgaging because they have fallen into negative equity, new analysis has suggested.

Widespread forecasts of major house price falls mean more than 89,000 homeowners who purchased with small deposits could be unable to refinance when they come to the end of their fixed-rate mortgages in the next two years. Negative equity means homes are worth less than their owners borrowed to pay for them.

Neal Hudson of BuiltPlace, an analyst, said: “The risk is massive. We could see an explosion in the number of mortgage prisoners. We could definitely see a lot of ­people stuck on higher-rate mortgages.”

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Next year an estimated 55,634 homeowners who purchased with deposits of 10pc or less will come to the end of two-year fixed-rate mortgages, according to analysis by Capital Economics, a research consultancy, commissioned by Telegraph Money. In 2024 the number will be 33,755.

Andrew Wishart from the firm said the more recently homeowners had purchased, the more they were at risk.

Many buyers who bought in early 2021 have already benefited from significant house price growth, which means they are more likely to have enough of a buffer to stop them falling into negative equity, Mr ­Wishart said.

“It is really those who bought in late 2021 and 2022 who are most at risk. The most serious negative equity is likely to come in 2024,” he added.

These homeowners – primarily first-time buyers, many of whom were encouraged to purchase because of the stamp duty holiday that ran until September 2021 – bought at what was likely to have been the peak of the pandemic property boom.

They also have the smallest financial buffer against house price falls, meaning they will face a crunch point when their deals end and are likely to be trapped on rates two percentage points higher.

House prices began to fall on a monthly basis in October, according to Nationwide Building Society. Analysts almost unanimously agree that a significant decline in house prices is in the pipeline as a result of higher mortgage rates and the biggest fall in real disposable incomes on record.

Oxford Economics has forecast a 12pc drop over the next two years. In Nationwide’s worst-case scenario forecast, there will be a 30pc collapse.

Based on an 8pc house price fall, 16pc of owners aged 16 to 34 will fall into low or negative equity over the next two years, according to the Resolution Foundation, a think tank.

Negative equity becomes a problem for homeowners in two situations. If they have to sell, they will owe the difference to their lender. And those who are in negative equity when they come to the end of their fixed-rate mortgage will struggle to refinance.

Lewis Shaw of Riverside Mortgages, a broker, said: “Categorically, you can’t remortgage if you’re in negative equity. Remortgaging [can] mean moving from one lender to another and [for that] you need a minimum of 5pc in equity.”

Aaron Strutt of Trinity Financial, another broker, said: “If you’re in negative equity it is basically impossible to switch lenders unless you pay off more of your mortgage.”

This means that borrowers cannot shop around for the best deal and must stick with their existing lender, which means they could have to pay far higher rates.

Many mainstream lenders offer “product transfer” options for existing borrowers – deals that do not require new affordability tests. In some cases, product transfer rates can be comparable to rates for new business. But in others, they are far more expensive.

Some lenders, such as NatWest, Nationwide and TSB, do offer transfer rates at 100pc loan-to-value or above.

Chris Sykes, of mortgage broker Private Finance, also noted a high street lender that will stretch its 90pc loan-to-value product transfer deal to borrowers with up to 99pc LTV.

But after that, they will be moved on to a standard variable rate. For some borrowers, SVR will be the only option as some lenders have no transfer rates at all.

Mr Sykes warned that moving on to SVR in 2023 or 2024 will be a much bigger problem than it is today. This is because SVRs move in line with the Bank Rate – which markets expect to rise to 4.5pc, up from 3pc today.

“Like trackers, SVRs have not taken future Bank Rate rises into account yet. Right now, they don’t look so bad, but normally they are two percentage points above fixed rates,” Mr Sykes said.

For a homeowner with an outstanding loan of £200,000, a two percentage point difference in their mortgage rate would cost them an extra £4,000 per year in interest.

Mr Shaw said: “They will have to sit there until the situation improves.”

Homeowners will also have made ­capital repayments since they purchased, which will help to reduce the risk of ­negative equity, but the amounts will be small. Borrowers tend to make smaller repayments at the beginning of their mortgage terms.