Why Negative Equity is Bad for First-Time Buyers

Falling House Prices and House Repossession

Feb 1, 2009

First-time buyers that have bought recently are experiencing falling house prices and negative equity. This is leading to house repossession and creditor harassment.

John Varley, Chief Executive of Barclays Bank, believes that falling house prices will continue. He expected property prices to be 30% lower than their early 2008 high. This is going to result in many first-time buyers experiencing negative equity. Why is negative equity bad for first-time buyers?

No Capital Growth for First-Time Buyers'

Many first-time buyers' purchase property because renting is seen as dead money. It isn't just about finding somewhere to live for many first-time buyers'; buying a home is seen as a great investment. It may prove to be a fantastic long-term investment, but negative equity creates great uncertainty in the short term.

The current economic woes are not only preventing capital growth, but the negative equity constitutes an erosion of a substantial house deposit. This can be demoralising for a first-time buyer that has struggled long and hard to save for their house deposit.

Negative Equity and Moving House

Life can be very unpredictable. First-time buyers' that have bought a home only to suffer a relationship break-up, involuntary unemployment or financial difficulties won't be able to move as negative equity mortgages are no longer available. Lenders want equity to cover their own costs in the event of default.

Lack of Remortgage Deals

A year ago, there were a number of negative equity or 125% mortgages available for first-time buyers with good jobs. This is no longer the case and most lenders will now require that a first-time buyer has a minimum of 20% equity. This may mean that those struggling with negative equity will have to remain on an uncompetitive remortgage deal.

House Repossession and Negative Equity

Should a first-time buyer suffer involuntary unemployment and not have unemployment insurance, this may lead to financial difficulties. Whilst the government has reached a voluntary agreement with some lenders not to take action against struggling borrowers for 3 months, house repossession still remains likely.

Should a house repossession occur, this will mean that the property will be auctioned. Whilst the lender is legally obliged to achieve the best market price, it is likely to fall well below true market value. To make matters worse, first-time buyers can be pursued by lenders for the balance for up to 12 years. Creditor harassment regularly only happens many years later when someone has got their life back together.

First-time buyers' that have already purchased a property should consider unemployment insurance from the few companies that still offer it. Others that are seeking to buy are advised to await the green shoots of economic recovery before buying a house or they may face negative equity themselves.

First-time buyers' that are seeking a safe home for their savings may wish to consider a tax-free cash ISA.

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