How bad mortgage crisis could get – from negative equity to being made homeless | Personal Finance | Finance

Mortgage borrowers have been urged to take action as many are at risk of being made homeless as they cannot keep up with rising payments, experts have told Express.co.uk.

With the release of the latest house price figures for July, experts at Nationwide warned a typical first-time buyer on an average wage with a 20 percent deposit on their mortgage would spend 43 percent of their take-home pay on repayments.

The new figures show the housing market remains volatile with house prices continuing to fall, down 3.8 percent for the year to July, the largest drop since 2009.

Myron Jobson, senior personal finance analyst at interactive investor, told Express.co.uk with the current increase in interest rates, more mortgage borrowers are at risk of losing their homes.

He said: “While higher monthly repayments could lead to a rise in mortgage arrears the current low level of unemployment could slow the rise in repossessions.

“However, with the cost of housing on the up, many homeowners struggling to repay their mortgage of families would be wary that something like a sudden illness or job loss, could leave them homeless.”

With the increasing pressures both on house sellers trying to get a return on their sale as prices fall and mortgage borrowers struggling with rising payments, how bad could the situation get for the housing market?

Negative equity

Mr Jobson warned the risk of negative equity could “catch many homeowners unawares”. He explained: “Those who purchased their property during the stamp duty holiday sugar rush which sent house prices soaring are at risk of seeing the value of their home fall below their outstanding mortgage balance – leading to the dreaded negative equity.

“This is problematic because if they decide to sell the property, the sale proceeds may not be enough to cover the mortgage.

“Negative equity can pose challenges for homeowners, as it restricts their options, making it difficult to refinance – especially given high mortgage rates at present – or sell the property.”

Jonathan Samuels, CEO of Octane Capital, said negative equity is always a possibility but house prices have not fallen over a prolonged enough period for it to be a real worry.

He said: “However, what we have seen is an uptick in the number of residential mortgages falling into arrears, hitting 158,577 in the first quarter of 2023, marking a 2.8 percent quarterly increase and a 3.7 percent annual jump.

“For those who fall behind on their mortgage payments, repossession is a very real worry and anyone who is concerned, or struggling to repay their mortgage should speak with their lender immediately.

“It simply isn’t beneficial for either party to have to resort to a repossession and so they will do all they can to help you negotiate any period of financial hardship.”

Worst case scenario for house prices

James Forrester, managing director of Barrows and Forrester, said: “In an absolute worst case scenario, the property market could return to pre-pandemic conditions which would see house prices reduce by around 20 percent, but again, this won’t be a cliff edge drop, but a natural correction seen over the long term.”

He said the figures from Nationwide show the current borrowing appetites of home buyers, but sold prices have stayed “largely static” this year.

He added: “It’s also important to note that any annual decline in market activity is in comparison to the market highs of the pandemic boom seen last year and so while property values may be stuttering, they remain there or there about when compared to these previous market peaks.”

22 percent fall in house prices

In a recent podcast appearance, Richard Donnell, director of Research at Zoopla, warned house prices will fall 22 percent in real terms by 2025, with a 10 percent nominal fall.

He also warned anyone buying a home between now and 2024 their buying power is down 20 percent because of the hit from inflation.

He said on the Moving Home with Charlie Youtube channel: “We’ve got this huge hit to buying power, you’ve got all these generations getting less well off than the one before.

“Mortgage rates can’t go any lower, they’ve gone up, let’s assume they’re going to stay at four to five percent for the next five or six years.

“The best house prices can do is rise in line with earnings or incomes, which might be one percent above inflation, but actually I think they’re going to underperform inflation and earnings for the next three to five years.”

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