ResidentialAug 13 2020

Help to Buy homeowners warned over negative equity

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Help to Buy homeowners warned over negative equity

Warnings have been issued over Help to Buy homeowners potentially falling into negative equity if property prices fall.

Alex Kemp, partner at Ideal Mortgage Advisers, said: “New builds do always come with a premium and they tend to not increase in line with the majority of properties under normal circumstances.

“With more difficult times expected ahead we would reasonably expect that if property prices were to reduce by 5 per cent, then this would mean that a lot of homeowners would be in negative equity.”

Nationwide’s house price index showed annual house price growth had recovered to 1.5 per cent in July. But Robert Gardner, chief economist at Nationwide, also warned of a “false dawn”.

Mr Gardner said: “Most forecasters expect labour market conditions to weaken significantly in the quarters ahead as a result of the after-effects of the pandemic and as government support schemes wind down. If this comes to pass, it would likely dampen housing activity once again in the quarters ahead.”

In its sector views published in February, the Financial Conduct Authority warned that Help to Buy consumers could be “more exposed” to any change in economic conditions.

It added: “A stagnant housing market, combined with the ‘new build premium’, could see a reduced number of remortgage options relative to a non-Help to Buy property. They are also more likely to face negative equity if property prices begin to fall.”

A freedom of information request to Homes England by consumer group Which? found that more than 5,000 Help to Buy homeowners made a loss on their properties in the first six years of the scheme, despite significant rises in house prices in their local areas.

However, Eve Morgan, owner and consultant at Morgan Harrison Mortgage Solutions, said that Help to Buy owners potentially benefited from being able to purchase a larger property than without the scheme, enabling them to “stay put longer and ‘sit out’ any fluctuations”.

Last month, the government confirmed an extension to the Help to Buy equity loan scheme in England to ensure buyers do not miss out if there has been a delay in construction due to the pandemic.