Following HM Treasury’s release of the latest Mortgage Guarantee Scheme statistics, Quilter highlighted the potential for more borrowers to be plunged into negative equity.
The Mortgage Guarantee Scheme offered lenders the option to purchase a guarantee on mortgage loans where the borrower has a deposit of less than 10%.
HM Treasury reported that the scheme helped to support over 37,376 mortgage completions from its launch in April 2021 to the end of March 2023.
Karen Noye (pictured), mortgage expert at Quilter, warned of this strong uptake in the 95% Mortgage Guarantee scheme, stating that borrowers should be wary of both the pros and cons before entering into a Government-backed scheme.
She said: “This morning’s mortgage guarantee scheme statistics show that there continues to be significant numbers of people taking out high loan-to-value (LTV) mortgage products despite a potential downturn in the market on the horizon.
“With the housing market showing signs of an impending slowdown, with some predictions showing a potential 10% drop is on the cards, there could be severe repercussions for those who have utilised the scheme.
“Negative equity in simple terms is when the outstanding balance of a mortgage is higher than the current market value of the property.
“In this scenario, if the householder decided to sell their property, the proceeds would not be sufficient to repay the outstanding mortgage.
“This is a real possibility for those who have taken high LTV mortgages such as 95% mortgages especially if house prices drop as predicted.”
She added: “The potential fallout of negative equity can be quite significant. For homeowners, it can mean being trapped in a property, unable to move or remortgage until the housing market recovers.
Furthermore, negative equity may restrict access to the best mortgage deals when homeowners come to remortgage, as these typically require some level of home equity.
“Should a homeowner with negative equity fall into financial difficulty and be unable to keep up with their mortgage payments, selling their home will not cover the full debt, potentially leaving them still owing money to their lender even after the property sale.
“While the scheme has undoubtedly provided a lifeline to many buyers, it is important for potential new applicants to consider the risks as well as the benefits at this moment in time.
“As the winds of the housing market change, its essential to make informed decisions to weather any potential storm.”
