Help for the middle class 'mortgage prisoners': Banks to be told to ease restrictions on the thousands caught in negative equity
Published
15th Dec 2011
* Homeowners will transfer negative equity to new homes
Banks are to be told to rescue middle-class ‘mortgage prisoners’ by loosening lending restrictions.
Because they are locked in negative equity, hundreds of thousands of hard-working people are unable to move to a new home.
Businesses are struggling to recruit managers from other regions and the housing market is stagnant.
But new mortgage application rules – to be announced next week by the Financial Services Authority – will give banks the green light to approve loans to trapped homeowners. This will apply to those whose loans amount to a very high proportion of their home’s value – and even those in negative equity.
For example, this could help a couple who had taken out a 100 per cent loan to buy a house for £100,000 only to see its value fall to £90,000.
At present, if they sold the house for £90,000 they would still owe the bank £10,000 more – money which they probably do not have.
But under the new guidelines, assuming they want to buy a property in another area for £90,000, they would sell up for £90,000.
Then – without having to pay off the £10,000 balance – they would remortgage to buy the new property.
The homeowners would still owe the bank £100,000 but would have effectively taken their negative equity with them.
The loosening of restrictions will be allowed only for good customers who have never had any problems repaying the mortgage they took out.
Those who have struggled with their payments will face tougher tests being imposed on all new customers.
While the FSA cannot force banks to lend, its conclusions will send a strong signal that it wants banks to approve mortgages for hard-working families who have been locked out of the housing market through no fault of their own.
On Monday – after a two-year inquiry – it will reveal proposals which are designed to stop a repeat of the excessive and dangerous lending that led to the banking crisis. This is likely to include a series of tough new rules, including a crackdown on interest-only deals, a ban on self-certified loans and requirements to detail spending habits.
But it will also tell lenders to distinguish between those good customers who meet their payments and the feckless who simply over-stretched themselves.
Almost two million homeowners are currently effectively excluded from taking a new mortgage for a variety of reasons including having fallen behind with payments, perhaps after losing their job.
According to figures from the Council of Mortgage Lenders, one in 12 homeowners, around 827,000, are currently in negative equity – where the value of their home is less than the amount of mortgage they owe.
The majority of these people put down only a small deposit, of less than 10 per cent or even none at all. A further 1.7million have less than 10 per cent equity in their property. These mortgage prisoners are also creating a block in the house and jobs market.
The FSA launched its review in 2009 after the credit crunch revealed the staggering deals that were peddled on the High Street.
Before 2007, homeowners could regularly borrow up to 125 per cent of the property price from banks such as Northern Rock.
Low-earning families were able to borrow seven times their income in order to afford more expensive houses.
To keep their monthly repayments low, they also often took out interest-only deals, where they only ever repaid the interest on their loan and never any of the capital. This put them at risk if house prices ever fell.
There was also a boom in self-certified mortgages – the so-called ‘liar loans’ – where borrowers never needed to prove what they earned.
Those who put down only a small deposit now find themselves in negative equity because house prices have fallen an average 19 per cent since August 2007, according to the Halifax.
And first-time buyers are being squeezed out of new homes as those they would normally have bought are being lived in by people who cannot move elsewhere.
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