Hope for homeowners in negative equity

• Featured Articles
• Published: 27 Nov 2009 in Money and Mortgages

By Esther Shaw

Homeowners trapped by negative equity have been thrown a lifeline by Coventry Building Society which has begun offering its customers mortgages worth more than the value of their properties.

This means that existing borrowers who need to move house for example, for a new job, will now be able to get a deal of up to a maximum of 125 per cent of a property's value.

The move will be very welcome news to those who can still afford their repayments but who would otherwise be trapped because they have little or no equity in their homes.

A helping hand

More and more borrowers have found themselves in this predicament due to the rapid fall in house prices which has left them stuck with a  mortgage worth more than the value of their property.

“We are aiming to help responsible borrowers whose need to move home is being restricted by having less equity,” says Colin Franklin from the Coventry. “These might include people who are trying to find work or those who need to move to accommodate a growing family.”

Following in the footsteps

The Coventry deal follows a similar move by the Nationwide Building Society back in July this year, which started offering existing customers loans worth 25 per cent more than the value of their home.

“The fact these lenders are making an effort to assist existing customers who are in negative equity but need to move home is good news,” says Melanie Bien from broker Savills Private Finance. “Borrowers in negative equity with other lenders are effectively trapped in their homes until the value of their property rises above that of the outstanding mortgage. And, with many lenders offering a maximum loan-to-value (LTV) of 95 per cent, if not lower, the value of the property would have to rise even further to enable the homeowner to move.”

Reckless or responsible?

While the mere mention of 125 per cent mortgages has prompted critics to complain that this is a return to the days of lenders irresponsibly offering large loans to new buyers, Coventry insists this is not the case.

“We are offering a sensible level of support to people we have a relationship with and who are facing real difficulty moving home,” says Franklin. “The Coventry is known for its responsible lending.”

Bien agrees that Coventry and Nationwide are not being reckless.

“On the contrary, these lenders are treating customers fairly and trying to help those who simply need to move - for whatever reason,” she says.

A raft of restrictions

Customers will not be allowed to borrow more cash  - they will simply be able to carry over the lack of equity into the new deal when they move house.

David Black from financial analyst Defaqto also points out that the 125 per cent LTV offer is only for the Coventry's existing mortgage borrowers who have an excellent credit history.

“One of the issues with the current mortgage market is that people with a very high LTV are effectively stuck with their existing lender as they are unable to remortgage elsewhere,” he says.

This, he adds, is not too much of a problem if you are able to service your mortgage and are not planning to move - and if your lender has a competitive standard variable rate (SVR).

“But if you do need to relocate, you could find yourself unable to do so,” he says. “Deals such as this from the Coventry enable their customers to move - and should be applauded.”

The start of things to come?

It remains to be seen whether more lenders will follow suit and begin providing assistance to creditworthy customers who have been impacted by falling house prices.

“With an increasing number of people likely to find themselves in negative equity next year, that could well be the case,” says Bien.

In the meantime, if you are one of the thousands of homeowners owing more than the value of your property, the key is to reduce the debt; simple steps such as small mortgage overpayments are a good place to start.

Rates correct as of 25 Nov 2009