Tuesday, 28 October 2008

Negative equity woes

There are reports today from the Bank of England that as many as 1.2 million homeowners face negative equity.

Having listened to SKY reporting this today, it is clear that SKY do not fully understand this.

SKY is reporting that negative equity is only a problem if you are trying to sell. This is not the case.

I'll use Abbey as an example of the problems of negative equity.

Let's say a borrower took out a fixed rate mortgage 2/3 years ago at around 5%. At the time the borrower put down a deposit of 5%.

Today your deal ends and Abbey look to put you on the Standard Variable rate of 7.09% an increase of almost 50% on your mortgage payments. If you are now in negative equity Abbey have no new deals for you and as you are in negative equity it is not possible to remortgage elsewhere.

So negative equity can cause problems even though the borrower may not be selling.

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