Remortgagers risk negative equity

Those who borrow against the value of properties in a declining housing market runs the risk of negative equity, MyMortgageDirect says.

09:57 11 October 2004

Homeowners who continue to borrow against the value of their properties while the housing market slows down are in danger of suffering the negative equity, an industry expert has warned.

A survey by broker MyMortgageDirect discovered that almost two-thirds of borrowers were still remortgaging to fund home improvements or luxury items such as cars and holidays.

And Peter Barrett, managing director of the online and telephone broker, cautioned that recent falls in the market meant borrowers should resist from relying on continuing house price rises to cover them.

He warned that some could end up with mortgages greater than the value of their homes - or negative equity.

"Clearly the market is going through a period of significant correction and we are concerned borrowers may be counting too much on their property's value continuing to rise to pay off additional borrowing for equity withdrawal," he said.

Many homeowners have used the property boom to release cash in their homes. Between 1998 and 2003 69 per cent of all remortgages withdrew equity.

"This time last year people were remortgaging like there was no tomorrow as their homes increased dramatically in value and using the equity in one's property seemed like a logical way to fund big ticket spending such as a new car," said Mr Barrett.

"But with significant price corrections - and reversals in some areas - we would urge borrowers to think twice about over-exposing themselves."