Negative Equity Looms, Crisis for Unsecured Lenders?

The Bank of England warns today that a 15% drop in house prices would push 10% of mortgage holders into negative equity. Whilst the advice that this will have little impact unless those mortgage-holders need to sell is true, that is only half the story says Insolvency partner Mike Simister of Lines Henry.

“Most home owners will try to ensure that they keep up mortgage payments. We are aware that people in financial difficulties often also have significant unsecured debt in the form of credit cards and loans. If negative equity becomes a major problem, many mortgage-holders will choose bankruptcy as the most appropriate route for them. Where a bankrupt is in negative equity, the Official Receiver has accepted a nominal sum (with legal fees) in return for selling the bankrupt’s interest back to the bankrupt’s spouse or back to the bankrupt. As long as the mortgage is not in arrears and continues to be paid, the mortgage lender is not concerned. Once people in financial difficulty realise this we predict a significant rise in the number of bankruptcies. The effect that this could have on the credit card and unsecured loan companies would be significant. Currently the average unsecured debt for those people entering IVA’s with us is in excess of £50,000. These are the same group that will be in negative equity”.