The term ‘negative equity’ has long carried a sense of foreboding, instilling fear not only in borrowers but also lenders.
This trepidation can perhaps be traced back to some of the lending practices of the past and the era of 125% loan-to-value (LTV) mortgages. Since then, the possibility of falling into negative equity has rightly become a common concern among both, and of course advisers as well.
Recent events, such as Skipton Building Society launching its 100% LTV product, reignited discussions about lending at higher LTVs, with critics always quick to associate such moves with risky lending practices.
Yet, with the current challenges around affordability for first-time buyers we may find the debate opening up around whether the threat of a small amount of negative equity is a price borrowers – and lenders – may be willing to take, in exchange for a place on the housing ladder.
While no borrower would willingly choose to be in negative equity, does the adage that negative equity ‘doesn’t matter unless you’re selling’ hold some truth?
A recent Treasury Committee hearing brought to light some of these questions, when Directors from Lloyds Banking Group (LBG) and Nationwide Building Society were quizzed about rate rises, house prices and forbearance.
Speaking to MPs, Andrew Asaam, homes director at LBG, emphasised the importance of keeping products available at higher LTVs for FTBs, telling MPs: “It is a completely individual situation but we still think that, for most people, owning a home is better than renting.”
He went on to say: “We need to make sure that those first-time buyers are resilient — that is, they can afford to stay in their home through a two-year period where house prices might be falling, for example, and are aware that they could end up in negative equity.”
He explained it does not want customers being completely unaware of the risk of house price falls and finding themselves in negative equity and vulnerable to unemployment. Adding; “We are thinking deeply about who we lend to and the disclosures that we make sure customers have about the potential for any house price falls.”
Henry Jordan, home commercial director at Nationwide, echoed this sentiment, explaining that only about 2.5% of its lending book is above 90% LTV.
He told MPs: “From a customer perspective…if they go into negative equity and maintain their payments, it might be for a fairly short period and would not have any direct impact on them. Clearly, if they are having wider payment problems at the same time that is where the other support measures that we have talked about would also kick in.”
The idea that negative equity can be tolerated for a limited time if the borrower remains financially stable and committed to the property, challenges the notion that negative equity is an absolute disaster every single time.
I always find it interesting that when buying a car, buyers understand their vehicle’s value depreciates as soon as they drive it off the forecourt. Despite this immediate loss in value, buyers are still happy to do so – in the knowledge that owning their car provides them with what they want and need.
In a similar way, owning a property offers the stability and certainty of tenure that renting cannot provide. What’s more, homeowners can usually try to increase the value of their home through upgrading, extending and renovating.
Of course, the risk lies within the unpredictability of house prices at times. However, while the consensus might be falls this year, the five-year forecast is still very much on an upwards trajectory.
In light of the current issues impacting on the private rental sector, with soaring rents and reports of renters becoming indebted to meet monthly payments, is a potential brief period of negative equity as catastrophic as previously believed?
For the mortgage industry, it is crucial to strike a balance between offering accessible products to first-timers and ensuring their awareness of potential risks.
If we are to see a greater number of higher LTV products launched to help first-time buyers, these will carry the inevitable risk of negative equity and this may need to be a place where lenders feel comfortable. As new wannabe buyers continue to face challenges around affordability, we may find ourselves as an industry increasing our tolerance of the risk of negative equity.
Simon Jackson is managing director of SDL Surveying
