Risky mortgages ‘put 100,000 in danger of negative equity’

THOUSANDS of house buyers have taken out risky mortgages which put them in danger of falling into negative equity, figures from the Bank of England show.

Almost one in five mortgages lent in the first quarter of 2019 – covering 38,000 people – was given to a borrower who paid a deposit of under 10 per cent.

This is the highest level since the end of 2007, before the global financial crisis struck.

If lending continues as its current rate, it means that more than 100,000 of these risky home loans will be issued this year.

It means that growing numbers of borrowers are exposed to a sharp fall in property prices which could wipe out all their equity.

Banks are increasingly willing to lend to customers with a deposit of just 5 per cent – meaning they could get a £200,000 house with only £10,000 saved up. This is risky as a relatively small drop in prices is enough to leave them stranded.

A 6 per cent price fall would mean the property was worth £188,000. So if the borrower sold, they would not have enough money left over to pay off their mortgage debt.

Negative equity occurs when a property’s value slips below the value of the mortgage. There are an estimated 500,000 homes in the UK currently in this position. The rise in high-risk lending comes as house prices in London have fallen by 1.2 per cent in the year to April 2019 and growth in the rest of Britain has begun to slow.

Justin Modray, from Candid Financial Advice, said: ‘Soaring demand for high loan-to-value mortgages is alarming, especially as house price growth is slowing and interest rate rises over the next five to ten years look very likely.’

The rise in riskier mortgages has prompted the Bank to look into tightening rules around how much money lenders must hold to cover their losses if customers become unable to keep up with payments.