Positive moves: Mortgage lenders are finding ways around negative equity

NEGATIVE equity has been haunting more than a million people since the property slump, accounting for around 7 per cent of all home owners in the UK. Those unlucky enough to buy at the top of the market and take large mortgages have found that their homes are now worth less than their mortgages and that they are unable to sell because they cannot pay off what they owe.

The number of those with negative equity peaked in the first quarter of 1993, according to the Bank of England's estimates, when almost 1.8 million households had a total of pounds 11.7bn of negative equity. This has now fallen to 1.3 million households with a total of pounds 7.6bn.

Three out of four households with negative equity, according to the Woolwich Building Society's latest survey, live in the South of England. About 13 per cent of owner-occupiers with negative equity live in the South-east, 12 per cent in East Anglia, 11 per cent in Greater London and 11 per cent in the South-west. The figure drops to 5 per cent in Wales, and 2 per cent in Yorkshire and Humberside. The North has seen negative equity disappear. Cases in Scotland and Northern Ireland are rare.

The Halifax announced new figures yesterday on its negative equity schemes launched last October. It has helped almost 500 borrowers of 5,000 who have approached the society. Around 1,500 more cases are being processed. Most of the requests have come from the South-east, South- west and London, with a few from the Midlands and Northern regions.

Some lenders have produced schemes to enable people with debts bigger than the value of their properties to move. The Woolwich launched the first one in November 1992, whereby parents with equity in their home guarantee the extra money needed for their offspring to move house when a larger loan is required.

It launched a second scheme in March 1993 for those who needed to move because of their jobs or growing families to properties of equal value to those they were selling. This year, a third scheme was produced for people with good repayment records who wanted to move for any reason.

They could borrow 125 per cent of the value of their houses as long as there was not more than a pounds 25,000 shortfall.

Adrian and Kim Cottington completed on their new home in East Sussex in March, thanks to the Halifax. 'We bought a flat at the top of the market in 1989, in Seaford for pounds 50,000.' says Mr Cottington, a finance manager.

'We borrowed 100 per cent, with most of it from the Halifax. And as far as I was concerned, you couldn't lose money on property. But who was to know what was to happen.

'Last year we had a baby, Hannah, who is now six months, and although the flat was very nice, we needed somewhere larger. I tried to sell our flat at first at a reasonable price, but soon realised the only way we would sell was by dropping that to pounds 35,000, the market price. Of course, the house we eventually bought was much cheaper, too.

'As soon as the Halifax's scheme was announced, we applied to our local office and were lucky enough to have someone who knew what they were doing. Through the scheme, we managed to buy our two-bedroom house in Lewes for pounds 52,500 this year. The Halifax lent us 100 per cent of the new property plus about pounds 12,800 shortfall from the flat. We had to pay all the costs of moving home out of capital.

'There were quite a few conditions to fulfil, and it took a while to sort out. I have a good job with a good salary, my wife works too, and my sister, who had enough equity in her house, was a guarantor as well.'

A spokeswoman for the Halifax says that it is not a condition of the scheme that borrowers provide a guarantor, but it helps to have that back-up as the loan is high-risk.

As with the other schemes, the shortfall - up to the pounds 25,000 limit - can be carried forward at the prevailing mortgage base rate, and the maximum repayment period is 20 years.

Britannia Building Society is now also offering a scheme, but this is limited to those who need to move due to work or family reasons. If a borrower wishes to trade down to reduce his mortgage debt, he can do so under the scheme, for whatever reason, provided his repayment record is good. Desmond Hudson, head of lending, says: 'We do think a sizeable number of our borrowers will be helped by the scheme, and we see lending on this product in terms of millions of pounds this year.'

Britannia stipulates that the money lent to cover the equity shortfall must be repaid over 10 years on a repayment basis. The main mortgage can be repaid by any method.

The Leeds launched its first negative equity scheme in July 1993, with customers having to have a genuine reason for moving. Now this has been opened to any borrower. 'The scheme has run quite successfully for several months,' says a spokesman. 'It has been tried and tested, so we decided to extend it.'

The total debt must not be more than 125 per cent of the new property, but there is no limit to how much shortfall can be carried forward. The residual debt must be repaid within 15 years, and the customer must put up 5 per cent of the additional borrowing. So far, the Leeds has around 200 applications going through, with half agreed and completed.

Scottish Amicable and Royal Bank of Scotland's Equity Builder mortgage allows homeowners to take a 100 per cent fixed, capped or variable-rate loan plus an additional advance at the same rate to cover the negative equity. The total may be up to 125 per cent of the value of the new home.

The negative equity portion of the loan is covered by up to 95 per cent of the surrender value of an existing with-profits endowment policy. Borrowers must be between 23 and 55.

(Photograph omitted)