One in six 'prime' borrowers in negative equity

One in six prime UK mortgages is in negative equity, with the possibility this figure could climb to one in three if house prices fall in line with its expectations, Fitch warns.

The ratings agency analysed loans representing almost 25% of all outstanding UK prime mortgages, with the ratings agency finding approximately 270,000 prime borrowers in negative equity.

Out of 2.7 million prime mortgages, making up £263bn securitised through RMBS, Fitch said more than £39bn of loans were in negative equity.

Ketan Thaker, director of the European RMBS team at Fitch, said while prime borrowers were unlikely to default solely because the value of their house was less than the outstanding balance of their mortgage, it expected default rates to be higher for borrowers in negative equity."

"Borrowers with equity in the property have options available to them in case of financial distress that borrowers in negative equity do not, for example sale of property, remortgaging, better availability and pricing of products, and the withdrawal of equity to fund temporary cash shortage, which could help avoid foreclosure."

Using the Nationwide house price index as a basis for house price falls, Fitch estimates that Northern Rock's master trust programme Granite accounts for the highest proportion of loans in negative equity at 32% of the total value of the loans.

Lee Bramzell, chief executive of portal PropertyIndex, said: "Negative equity is only affecting 10% of borrowers and won't deter the greater majority from moving if they need to. Anyone coming to the market now is more financially savvy than ever before.

Bramzell added: "Lenders' tightened criteria have meant that homebuyers are very much more aware of how much they can borrow and positive signs of house price growth, driven by a shortage of property for sale, has given a boost to the market with an increase in buyer activity."

jamie.obertelli@incisivemedia.com