Updated on June 26, 2019
Why Negative Equity Has Hit Home Buyers
One of the biggest sectors which was badly hit when the credit crunch started was that of property. In places like the US and the UK there were many thousands of homes which fell in price by huge amounts as some owners could no longer afford to repay their loans, and the glut in available properties kept the prices low.
Other parts of Europe, such as Spain, have seen an unprecedented volume of homes for sale, many eventually selling for up to one half of their valuations from just a few years ago.
It is getting harder for first time buyers to get on the property ladder, and if plans by the Bank of England are enforced it will mean an even bigger struggle to take that first step.
Some countries like the UK have traditionally loaned higher proportions of the value of homes, when compared to some other countries – France and Germany for example. This has resulted in there being less equity in the home, and it’s this that can land the buyer in trouble during the hard times.
Under the Bank’s plans, buyers won’t be allowed to take out a 100% mortgage. Instead prospective buyers would have to put down between 10 per cent and 25 per cent of a property’s purchase price as a deposit before being able to get a loan. Some financial institutions have in the past lent as much as 125 per cent of their property’s value. When prices crashed the result was thousands of home owners stuck in negative equity.
It has become clear that what many would see as irresponsible lending in both the US and the UK has had disastrous consequences for millions, not just homeowners either. Subprime mortgages have been part of the root of the world’s financial woes, and most of us are still living with the effects, which includes higher unemployment, higher taxes, bank bailouts, difficulty in obtaining loans – even for those individuals and businesses which are credit worthy. And it has to stop somewhere.
And in the long term putting down a decent size deposit makes sense. It means that the repayments each month should be lower, thus making it more likely they will remain affordable, even if and when interest rates rise.